As Global Superpowers Question Free Trade, Africa Welcomes it With Open Arms

The establishment of the African Continental Free Trade Area (AfCFTA) is both ambitious and impressive, not the least of which because it created a platform for 53 heads of state across a vast and diverse continent to agree on something. But whether or not it’s a game changer for intraregional trade – or the region’s financial markets – depends to a large extent on whether Africa’s leaders knuckle down and finally address far more practical barriers to growth and cross-border commerce.
In March 2018, after five years of negotiation, African Union (AU) members took a big step towards bolstering intraregional free trade by establishing the African Continental Free Trade Area (AfCFTA), a wide-ranging agreement to eliminate tariffs on nearly 90% of goods, liberalise trade by eliminating red tape, and – eventually – create a continent-wide, 1.2 billion person-strong single market with a combined GDP of more than USD3tn and which includes free movement of capital, services, goods, and eventually, labour.
After securing the minimum 22-country ratification threshold at the end of May 2019, signatories are now in the process of negotiating an operational framework to help hash-out important customs and trade issues like rules of origin, tariff schedules, payments and settlements, with the aim of finalising the framework ahead of an AU summit in July.
Hopes Are High, Expectations Less So
Hopes are high that the deal will lead to material growth in intraregional trade, and for good reason. Some progress is being made on the development of a middle-income segment in countries like South Africa, Nigeria, Botswana and Ghana. But a potentially toxic cocktail prevalent elsewhere on the continent – declining but relatively high fertility rates, poverty, and an inability to move up the value chain in terms of the production of, or demand for, goods and services – risks eroding the demographic dividend many once ascribed to the region.
In terms of intraregional trade specifically, Africa has largely lagged behind her peers across emerging and developed regions, where the prevalence of country-to-country trade is unevenly distributed and largely centred around just four countries: South Africa, Namibia, Zambia and Nigeria. According to Afreximbank, intraregional trade in Africa accounts for just under 15% of overall trade (or approximately USD120bn), compared with 20% for Latin America, 28% for North America, 58% for Asia and 67% for Europe.
But as key details of the AfCFTA are thrashed out, anyone looking for a clear sense of how it will influence trade or economic development should tread carefully.
An oft-cited Economic Commission for Africa (ECA) report suggests the agreement has the potential to boost trade by up to 52.3% by eliminating import duties by 2022; with Nigeria’s recent inclusion in the pact, after initially pulling out last year just days before they were due to join, the AU increased that figure to 60% by 2022. The ECA said that could double if non-tariff barriers are also reduced. But all of these forecasts come with a sizeable list of largely unrealistic caveats – including, notably, full implementation of the AfCFTA by 2017 and tariff harmonisation.
“Laudable though it may be, it seems difficult to imagine how the scale of growth and improvement in intraregional trade being talked about is going to be achieved with this deal in its current form,” explains Robert Besseling, executive director at EXX Africa, a political and economic risk consultancy.
The current approach to tariff removal and exemptions appears problematic from the outset, especially as many African countries pursue moving up the value chain when it comes to domestic production. 
Exports produced by the extractive sectors like oil & gas, coal, minerals and precious metals, which make up a varying but often sizable portion of the economic base of most African countries, appear likely to see tariffs reduced or removed altogether. But these are already largely aimed at export markets in Asia and Europe. Intraregional trade flows are well-diversified, but they tend to contain a much higher proportion of value-added goods than those exported to the rest of the world – clothing, vehicles and white goods, for instance.
Many of those goods, however, may appear under an exemptions list that seems vulnerable to expansion as the practical ins and outs of the operational agreement are developed over the coming months; given the high degree of economic concentration in certain sectors, just two or three exemptions could drastically alter the prospects of some countries.
The (African) Elephant in the Room
Another ideological challenge is that many African nations – whether economic minnows like Togo or Tanzania, or heavyweights like Nigeria – continue to embrace protectionism, whether in the form of import restrictions, prohibitions on local employment, and local content requirements.
But the real elephant in the room is potential foregone revenue. Many African countries – particularly though not exclusively smaller, land-locked states – generate a high proportion of tax revenues from customs and duties; and, many of these countries have yet to articulate a clear strategy for replacing those with more sustainable sources.
In 2017, Botswana generated 44.8% of all tax revenues through customs and duties. Gambia, similarly, generated 45% of its tax revenues from customs, while the DRC, Benin, Togo, Lesotho, the Maldives, and Ethiopia raised 34.5%, 25%, 20%, 19%, 18% and 17% of tax revenues, respectively, from import duties. Those are not insubstantial sums.
“It is encouraging to see such a high volume of signatories for the AFCFTA, but the hard work really only starts now… and given the high proportion of revenues these countries derive from customs and duties, reducing or removing tariffs is going to be a very expensive and politically difficult process, especially for smaller countries like Benin or Togo,” explains John Ashbourne, a senior emerging market economist at Capital Economics.
When it comes to ‘walking the walk’, the conviction amongst some of the region’s largest economic players to abide by the ethos of the agreement may be curtailed by their own domestic macroeconomic challenges.
Nigeria, despite its more recent overtures and intimations around implementing the continental free trade agreement, is more likely than not to face those challenges as it maintains stringent FX controls and import restrictions in a bid to shore up as many US dollars as it can muster – despite the progress made on bolstering its reserves over the past year.
With incumbent Central Bank of Nigeria Governor Godwin Emefiele recently appointed for another term, analysts largely expect a continuation of the status quo. 
Around two-thirds of Nigeria’s government revenue, much of which is derived from the export of crude oil and petroleum products, goes towards debt servicing.
The government also plans to borrow up to USD2.3bn from external markets over the coming fiscal year (and another USD2.3bn equivalent from local markets), and in the longer term, hopes to increase infrastructure investment to the tune of USD10bn to USD20bn over the next five to ten years.
“The economic situation and the trajectory of its ambitions seems to dictate that it is likely more interested in pursuing dollar revenues, which are largely derived outside the continent.”
Making Multiple Overlapping Communities Work Together
Perhaps more uncertain is the extent to which overlapping regional blocks and communities will dovetail with the proposed structure of the free trade area.
Of the eight economic communities recognised by the African Union, some – like the Common Market for Eastern and Southern Africa, a 21-member free trade area stretching from southern central and north eastern Africa – risk becoming largely redundant. Others, like the increasingly tightly-knit though at times tempestuous East African Community (EAC), will likely need to confront some difficult questions about how they proceed on sub-regional integration in the context of a much wider effort to place countries near and far on level ground.
“There exists a plethora of rules that govern trade between Kenya and Uganda, for instance, but no such framework – until now – exists to regulate trade between Kenya and Ethiopia, so in that sense, something like an AfCFTA is very beneficial,” Ashbourne explains.
Indeed, the agreement could be of most near-term benefit for countries that largely rub up against these existing trade zones and communities – like Zambia, for instance – but that haven’t yet been included in them. Others, like Rwanda for instance, could ably position themselves as thoroughfares to support further trade across these multiple overlapping communities.
But, that a more ambitious free trade agreement could help overcome tensions that already persist against a backdrop of ongoing trade integration seems unlikely.
Both EAC members Kenya and Tanzania only recently began de-escalating from a bilateral trade war which last year saw tit-for-tat imposition of duties on various goods, import bans on certain commodities, and – apparently – intentional delays at the border between the two nations, largely designed to frustrate traders by slowing the movement of people and goods.
“The real question at the end of the day is whether a country like Kenya will – politically and practically speaking – feel comfortable treating goods or labour migrants from Nigeria or Ghana in the same way it would those from Tanzania or Uganda.”
Relieving Non-Tariff Bottlenecks to Trade in Africa is Key
Nobody said free trade would be easy, particularly when it means eroding trade barriers between 53 countries. The initiative should be celebrated and supported both within and outside the continent. But even if legal harmonisation were achieved, payment mechanisms fully fleshed out, or tariffs reduced to nearly zero on all intraregional trade, we are still left with a chronic need for infrastructure to support it.
Estimates by the African Development Bank published at the end of 2018 suggest that the continent’s infrastructure needs across power, water and transportation amount to between USD130bn and USD170bn a year, with a financing gap of up to USD108bn, far higher than previously thought.
Due in part to the nature of demand for goods produced in Africa, much of the continent’s logistics and trade infrastructure being prioritised is primarily outward-facing, designed to carry things like palm oil, cocoa or precious metals to export markets in Europe and the Far East. China accounts for a substantial source of demand for these products, as well as a growing share of the funding used to develop port and rail infrastructure to support their export, raising concerns not only about how the region’s economies will be able to finance that gap (whether through Chinese borrowing or more expensive loans or Eurobonds), but which projects get prioritised first.
Razia Khan, Managing Director and Chief Economist for Africa and Middle East at Standard Chartered Bank, says that while it’s far too early to pass judgement on AfCFTA’s implementation, most of the region’s economies must still overcome the hurdle of the lack of enabling infrastructure to facilitate the physical trade in goods, especially intra-regionally.
“While there is a need for more investment, given the recent rise in public debt ratios, affordability is also a question… the key bottleneck is the lack of enabling infrastructure to facilitate more regional trade. Much of Africa’s trade has traditionally had an external focus, rather than an intraregional focus, and the major infrastructure – ports, road, and rail – largely reflects this.”
Opinions are split between those who believe the AfCFTA will in itself incentivise more inwardly-directed infrastructure that supports transportation and trade, and others who argue that the nature of domestic economic demand in many African countries would have to change before regional leaders see a need to start pumping billions of dollars into new rail or road networks.
“It’s a classic Chicken-and-Egg problem. [African] leaders need to see progress on industrialisation, which will create new and more highly-paid jobs, and stimulate demand for higher-value goods that can be produced within the region – thereby providing a stimulus for trade. But the same leaders are either unwilling or unable to afford the scale of infrastructure investments required that can support further trade of those goods until it’s clear there is demand,” Besseling says.
That Chicken-and-Egg paradigm isn’t just linked to physical infrastructure. Financial services, which are largely absent from the AfCFTA and related discussions, could in fact become one of the leading beneficiaries of the proliferation of free trade on the continent, assuming the benefits of cross-border financial activity can be more widely dispersed. The risk is that regional leaders of nations with smaller, less-developed financial sectors respond negatively to incursions from pan-regional heavyweights like Standard Bank or EcoBank, or international investment banks emboldened by regulatory harmonisation.
“[Financial services] would be difficult to include [with AfCFTA] because the firms, which would benefit from easing of doing business cross-border, would largely be from a handful of countries – South Africa, Kenya, or Mauritius, for instance. For countries that have poorly developed or small financial sectors, their governments would rightly be quite worried about the implications of opening up their banking systems to South African and Kenyan lenders,” Ashbourne explains. “It would be an amazing opportunity, but there would be a lot of opposition.”
But more intraregional trade and labour migration could certainly stimulate greater need for supporting financial services infrastructure in Africa, a longstanding bottleneck for pan-African businesses. Given the scale of economic migration in Africa, which arguably favours less than a handful of economic powerhouses in terms of attracting talent, greater financial integration could make it easier for SMEs and large organisations alike to borrow or establish themselves in other parts of the region. For larger organisations, greater financial integration could also mean finally moving beyond having to choose between borrowing in one’s domestic currency or borrowing in hard currencies.
“Financial services are less constrained than other economic sectors in terms of their cross-border reach, and this is potentially where the impact of an increased intraregional focus is likely to be both the most rapid, and the most profound. While some element of regulatory harmonisation will still be needed, with the adoption of digital banking the benefits of greater scale economies are likely to be significant,” Khan concludes.
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