On March 21, 2018, 44 African countries signed the African Union’s (AU) Continental Free Trade Agreement (ACFTA). The AU aims to use the ACFTA as a conduit for the creation of a single market and customs union on the African continent, akin to the trade blocs established by the European Union. The first step, however, will be to remove tariff barriers on 90% of goods traded between the ACFTA’s signatories. The creation of the ACFTA is significant because it aims to harmonize rules between overlapping regional economic communicates (RECs) that emerged in the 1980s. It is also a positive development because it will likely reverse the trend of increased protectionism that swept across commodity exporting markets after the oil price crash of 2014.
Trade across borders in Africa has presented challenges for decades, partly because patterns of trade reflect those established during colonial periods, namely to facilitate the export of commodities to Europe. For example, the United Nations Conference on Trade and Development (UNCTAD) estimates that around 80% of international trade conducted by African states takes place with non-African markets. Furthermore, trade that does take place between African countries is heavily regionalized. UNCTAD also estimates that over 80% of intra-African trade occurs within RECs, for example between members of the Southern African Development Community, or between members of the Economic Community of West African States. Consequently, just 4% of trade conducted by African states takes place with another African country that is not within the same REC. While this illustrates the low levels of intra-African trade, it provides a promising outlook for the impact that the ACFTA—once fully implemented—could have on bilateral trade within Africa.
What does the ACFTA mean for MNCs?
Full implementation of the ACFTA would result in improved operating conditions for MNCs trading between African countries. For example, the lowering of trade barriers would create new options for organizing supply chains, potentially opening up new and more cost-efficient routes to supply customers. MNCs will also benefit from the formalization of cross-border trade. Currently, large portions of cross-border trade in Africa are informal (i.e. illegal) because customs controls are inefficient and highly bureaucratic. Therefore, increased efficiency for goods being formally traded across borders would reduce the competitive threat posed by parallel and illicit imports that currently undermine sales for MNCs in many markets.
However, not all industries (or countries), are expected to benefit equally from the ACFTA, partly because it has been designed with the aim of stimulating Africa’s industrial development, and to a lesser extent, raising agricultural productivity. Consequently, benefits from the ACFTA would flow most directly to countries with the largest manufacturing bases, notably South Africa, Egypt, Morocco, Nigeria, and Kenya. While this would stimulate economic activity in these markets—and therefore raise employment and demand for MNCs’ products—competitive pressures from African companies would likely intensify.
In practice, however, even if the ACFTA is fully implemented, infrastructure constraints will still pose a significant barrier to cross-border trade for MNCs. Congestion at ports, foreign currency shortages, weak domestic transport infrastructure, and sclerotic bureaucracy will also prevent the full benefits of the ACFTA from being realized.
How likely will the ACFTA be implemented?
The ACFTA will only come into force once 22 countries ratify it. This presents a problem because uptake of the ACFTA has been mixed. Countries such as Rwanda have championed the ACTFA, but it has received a lukewarm reception from the continent’s two economic power houses: South Africa is yet to sign the ACFTA, and Nigeria has signed but not ratified it. Without the backing of these two countries, the effect of the ACFTA on economic growth, and the potential benefits for MNCs, will be curtailed.
Furthermore, even once it is ratified by 22 countries, there will be additional hurdles to overcome before the ACFTA becomes fully effective. Creating an effective enforcement mechanism—for example a body that functions like the European Court of Justice which settles disputes between members of the EU’s single market—will be crucial to ensure multilateral adherence to the removal of tariff and non-tariff barriers. Furthermore, harmonization of regulations and standards across the continent will likely take many years to complete because of domestic political opposition within countries. Additionally, the creation of a common foreign trade policy—another aim of the ACFTA—will be difficult to establish. Therefore, while the ACTFA bodes well for the future of trade policy across Africa, MNCs should not expect a significant reduction in barriers to cross-border trade for the next several years.