May 31, 2019 09:55 AM / By Prinesha Naidoo of Bloomberg / Header Image Credit: Bloomberg
Africa, largely ignored in a U.S.-China trade war that could roil economies worldwide, is quietly piecing together the world’s largest free-trade zone.
The African Continental Free Trade Area comes into force on paper on Thursday after the required 22 countries ratified the deal a month ago. Once it’s passed by all 55 nations recognized as part of the African Union, it would cover a market of 1.2 billion people, with a combined gross domestic product of $2.5 trillion.
The potential benefits are obvious, if the usual hurdles of nationalism and protectionism don’t yet stand in the way.
The deal would help the continent move away from mainly exporting commodities to build manufacturing capacity and industrialize, said Jakkie Cilliers, head of African Futures and Innovation at the Pretoria-based Institute for Security Studies. Boosting intra-regional trade would spur the construction of roads and railways, reducing the infrastructure gap in Africa, he said.
Trade between African countries is at 15%, compared with 20% in Latin America and 58% in Asia, according to the African Export-Import Bank. This could increase by 52% by 2022 and can more than double within the first decade after implementing the deal, the Cairo-based lender said in a report last year.
After four years of talks, the mechanics of the agreement will be negotiated in phases and it should be fully in operation by 2030. Non-trade barriers, such as delays at ports, and politics, would have to be navigated before the plan to remove tariffs on 90% of goods can be realized. Negotiators will also have to convince economies reliant on these levies for revenue to let them go.
“This is a technocratic agreement,” said Ronak Gopaldas, a London-based director at Signal Risk, which advises companies in Africa. “It’s aspirational in nature and while the direction is positive, translating what has been agreed by the technocrats and the policy makers into stuff that has a material impact on the ease and the cost of doing business and fosters more integrated markets” will remain challenging, he said.
One hurdle to integration is Nigeria. The country that vies with South Africa for the title of Africa’s biggest economy, hasn’t signed up yet. Now re-elected, President Muhammadu Buhari is reviewing an impact-assessment report.
Analysts including Tshepidi Moremong, the head of Africa coverage at FirstRand Group Ltd.’s Rand Merchant Bank, say the deal could still face opposition from oligopolies making “super profits” in the West African nation. Nigeria is one of three countries, including Benin and Eritrea, that hasn’t signed the deal. Twenty-two nations, including South Africa, have ratified the text, the next step after signing.
The trade pact’s implementation could also be scuppered if leaders seeking re-election put sovereign interests ahead of the continent, Moremong said.
“In each of our countries, there are proper issues that one needs to deal with and where people need to see that the government is focused on their day-to-day issues,” she said. “Opening up a market for the people from other parts of the continent to freely come and do commerce and trade in your country is going to take a lot.”