What future for free trade in Africa?

One year after the establishment of the African Continental Free Trade Area, what benefits has it already brought and what challenges does it face?

La African Continental Free Trade Area (ZLECAf) was officially launched on 1^er January 2021. This strategic instrument aims to support African economies, foster their development and facilitate their integration.

While it is too early to draw up an assessment of its action, this article intends to examine the potential benefits and the challenges relating to the implementation of this agreement.

Why the “regional integration” agenda was relaunched in 2018

Between 2000 and 2015, Africa benefited from sustained growth, driven by a strong wave of foreign direct investment, and marked by a sharp decline in poverty.

However, structural transformation still needed to be intensified to absorb the surplus agricultural labor force, reduce the continent's dependence on natural resources and thus guarantee it a less vulnerable growth. The fall in commodity prices since 2015 and its negative effect on the continent's growth have reaffirmed this need.

Several factors are likely to accelerate structural change (urbanization, infrastructure, etc.), including trade integration. In particular, the new organization of international trade with the segmentation of production processes offers, as we thought, interesting opportunities to develop a model based on integration in value chains.

Indeed, global value chains give countries the opportunity to integrate into the global economy at a lower cost by producing only certain components or performing only certain tasks. This allows them to take advantage of their comparative advantages, while diversifying and sophisticating their export baskets.

However, in Africa, trade with the rest of the world remains very much oriented towards natural resources, while intra-African trade is based more on processed goods.

What trade integration looks like today in Africa

It is essential to distinguish intra-African trade from that with the rest of the world. Intraregional exports are indeed more diversified and have a higher technological content than exports to the rest of the world. Natural resources alone account for 65% of African exports outside the continent (Graph 1).

According to the report on global investment, 40% of foreign direct investment in Africa goes to industries related to natural resources, mainly in the mining sector. The latter has low value added and is capital intensive, which has prevented the development of global value chains in the manufacturing sector. This contrasts sharply with intra-African trade, which is based more on manufactured goods (for more than half), but also agricultural (for almost 20%).

Strengthening regional integration would allow the development of regional and then global value chains

Intraregional trade does not represent than 15% of total trade in Africa, compared to more than 60% on other continents. The existing regional economic communities show a degree of integration that is still too low (Graph 2), as they mainly focus on lowering customs tariffs without proposing to reduce other trade barriers and without linking the countries' trade policy to their policy. industrial.

However, there now exists this continental economic community (already mentioned in the annexes to the 1991 Abuja Treaty on regional integration and relaunched by AU Agenda 2063) which could facilitate intra-African trade by enabling better integration of the continent’s economies into value chains.

Let's first look at the content because if it is too early to draw up an assessment, we can still wonder about the capacity of this device to support the economic performance of the countries of the continent.

It can be seen that the ZLECAf intends to take charge of the decisive subjects for integration into value chains, those which have never or rarely been addressed in the continent's previous regional agreements. The agreement proposes protocols so that the 54 countries agree on different trade rules related to standards of products, services, e-commerce, intellectual property rights, competition and investment. The objective is not to be a simple trade agreement, but a strategic instrument for the development and integration of Africa.

The sectors frequently cited as potential beneficiaries of this new framework are mainly in industry, then in services and finally in agriculture. Agribusiness could grow regionally, especially if countries can agree on sanitary and phytosanitary standards.

The emergence of the pharmaceutical sector, which appeared necessary with the Covid-19 pandemic, will also depend on progress on the chapter on phytosanitary standards, but also on agreements on the protocol on intellectual property rights. The textile sector could see the entire clothing production cycle take place on the continent, if countries agree on the rules of origin of goods and on the protocol governing investments.

Expectations are also high in the five service sectors included in the agreement and more particularly for business services, tourism, but also transport. Results in these areas will also be dependent on progress on the free movement of persons annexes to the agreement and the memorandums of understanding on investment and e-commerce.

The study of world Bank indicates that the demand for services for the purpose of exporting goods should also increase and benefit from the establishment of the free trade area.

The challenges of regional integration and the AfCFTA

Nevertheless, certain challenges will have to be met so that the AfCFTA keeps its promises of economic development and completes this objective of integration with accompanying policies to achieve a structural transformation for the benefit of the greatest number.

• Finding common ground between the 54 member states

The AU Agenda 2063 carries with it three objectives that are difficult to reconcile for the establishment of the ZLECAf. These three objectives are deep integration, broad country membership and pan-African solidarity. This forms what Melo et al. calls the "trilemma" of regional integration in Africa. Finding a balance between an agreement with as many heterogeneous members as possible and making in-depth progress on sensitive issues while offering more favorable treatment to the least developed countries will be decisive.

Manage harmonization with existing regional agreements on the continent

The regional integration agenda having been launched almost thirty years ago, the countries of the African Union adhere to regional economic communities (RECs), which already have their own rules, and sometimes to organizations (such as customs unions ) which include a higher level of integration than the free trade area. The RECs will have to harmonize their operating rules to be as consistent as possible with those of the ZLECAf.

The implementation of the AfCFTA will create winners and losers within each country and between the different member states. A compensation mechanism is planned, but nothing has yet been worked out. There is no doubt that the effective implementation of this agreement will depend on the satisfaction of the Member States vis-à-vis this mechanism. The AfCFTA Secretariat is already anticipating offering assistance to each Member State to establish support policies, in order to offer compensation to those who will benefit the least economically from this agreement. This will be necessary in order to avoid blockages by the signatory countries.

Above all, the ambitions raised and the aspirations set out by the ZLECAf cannot materialize without a real – inclusive – structural transformation of African economies. Further reforms and accompanying policies in line with the Sustainable Development Goals at the national and continental level (infrastructure, digital transformation, renewable energies, gender, education) will be needed for the AfCFTA to effectively serve the structural transformation in favor of greater productivity, better growth and the creation of decent jobs, among others.

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Julien Gourdon, Economist, French Development Agency (AFD)

This article is republished from The Conversation under Creative Commons license. Read theoriginal article.