Africa’s Free Trade Agreement is Expected to Favor Small Businesses, But Challenges Lie Ahead.
Updated: Jun 9, 2019
In March last year (2018), the leaders of 44 African countries endorsed the African Continental Free Trade Agreement (AfCFTA). Since then the agreement has drawn enough signatures to go into operation, Gambia being the 22nd nation to ratify the agreement on Tuesday, April 2.
Obviously, any economic policy that facilitates imports and exports among member countries - with lower or no tariffs, free access to the market and market information, and the elimination of trade barriers - offers numerous benefits to SMEs.
And as history's largest free trade agreement, which has a market size in the region of $3 trillion, most people are excited at the development.
The Long Road to the AfCFTA
The AfCFTA is not the continent’s first call for greater economic integration. In 1980, the Lagos Plan of Action for the Economic Development of Africa was spearheaded by the Organisation of African Unity to push Africa’s resource-intensive economies towards industrialization and greater regional integration.
Coupled with the 1991 Abuja Treaty, the Lagos Plan of Action proposed the creation of Regional Economic Communities (RECs), with the hope of improving regional economic integration and advancing certain peace and security initiatives.
Unfortunately, with the possible exceptions of the East African Community and the South African Development Community, most of the eight RECs recognized as the “building blocks” of the African Union (AU) have struggled to yield the results necessary to spur substantial economic growth and harmonize the continent’s disparate markets.
What’s the Potential Positive Impact of the AfCFTA?
1. New markets
The AfCFTA will allow African-owned companies to enter new markets. This expands their customer base and leads to new products and services, making investing in innovation viable.
2. Economic growth
Manufacturing represents only about 10% of total GDP in Africa, on average. This is well below the figure in other developing regions. A successful continental free trade area could reduce this gap. A bigger manufacturing sector will lead SMEs to create more well-paid jobs, especially for young people, thereby alleviating poverty.
3. Foreign direct investment
With restrictions lifted on foreign investments, investors will flock to the continent. This adds capital to expand local industries and boost domestic businesses. New capital enhances an upward productivity cycle that stimulates the entire economy. An inflow of foreign capital can also stimulate banking systems, leading to more investment and consumer lending.
5. Reduction in input costs
The AfCFTA will ease the process of importing raw materials from other African countries. It will also enable SMEs to set up assembly firms in other African countries, in order to access cheaper means of production and thereby increase their bottom lines.
6. Increased efficiency and sales
Global companies have more expertise than domestic companies to develop local resources. That's especially true for businesses in the manufacturing sector. The AfCFTA will allow multinationals to partner with local firms to develop raw materials, training them in best practices and transferring technology in the process.
The Major Challenge
A major potential challenge in harmonizing Africa’s heterogeneous economies under one agreement is the wide variation that exists in their levels of development. For example, over 50% of Africa’s cumulative GDP is contributed by Egypt, Nigeria and South Africa, while Africa’s six sovereign island nations collectively contribute just 1%.
The AfCFTA has the greatest levels of income disparity of any continental free trade agreement, and more than double the levels witnessed in blocs such as ASEAN and CARICOM.
1. Increased competitive pressure
Many emerging African markets are traditional economies that rely on farming for employment. These small family farms can't compete with large agri-businesses in high-income African countries such as South Africa, Kenya, Ethiopia, Egypt and Nigeria. As a result, they may lose their farms, leading to high unemployment, crime and poverty.
2. Choking of local SMEs
Consumers always prefer cheaper products. This may lead to local producers losing huge sales to foreign suppliers, because the latter can lower the cost of their products by leveraging the reduced tariffs imposed on imported goods.
3. Adverse working conditions and job losses
Labourers from poorer countries may be forced to work long hours and to live in shanties without basic amenities such as drinking water and electricity, in order to send money to their families. Some workers might even be forced to accept lower wages and be prevented from joining labour unions, under threat of losing their jobs.
This may explain why the Nigerian Labour Congress (NLC), in their refusal to endorse the agreement, describes the trade agreement as a "renewed, extremely dangerous and radioactive neo-liberal policy initiative".
4. Environmental depletion
Tough competition may lead some companies to disregard the environment when it comes to making products and disposing of waste, just so they can survive in their industry. Many SMEs are likely to cut costs, including those related to manufacturing and the proper dumping of waste.
5. Theft of intellectual property
Many African countries don't have laws in place that protect patents, inventions and new processes. The laws they do have aren't always strictly enforced. As a result, companies' ideas often get stolen. With the AfCFTA, this could get worse, leading SMEs to invest poorly in research and development.
The AfCFTA has huge potential to make doing business on the continent easier. However, the enormity of the challenges of implementing the agreement should not be under-estimated.
Without comprehensive policy-making and preferential treatment for Africa’s most at-risk economies, the AfCFTA could prove to be a force for economic divergence, rather than a force for good.
It is therefore important that participating countries build an efficient and participatory institutional architecture to avoid leaving any economies behind.
To increase the impact of the trade deal, industrial policies must also be put in place, especially those concerning SMEs and manufacturing. These must focus on productivity, competition, diversification and economic complexity.
Furthermore, individual countries under the agreement should introduce policies that address the concerns of labour unions, encourage healthy competition without killing local businesses, ensure strict adherence to waste disposal and protect intellectual property.