Wole Olufunwa Director (Partner), Head of Africa Group
The African Continental Free Trade Area: Africa speaks with one voice
After years of preparation, negotiation and operational delays caused by the COVID-19 pandemic, 1 January 2021 marked the commencement of the long-awaited African Continental Free Trade Area (“AfCFTA”). The AfCFTA seeks to create a liberalised market of trade in goods and services and encourages free movement of people and investments. The AfCFTA undeniably presents a significant opportunity to transform trade and facilitate Africa’s post-pandemic recovery.
On this Africa Day (25 May 2021) we consider the potential of the AfCFTA and what it means for trade on the continent. This article is the first in a series of articles that will look at the impact of the AfCFTA on various practice areas and industry sectors in which we serve our clients including:
- Dispute Resolution
- Maritime and Transport Logistics
- International Trade & Commodities
- Energy & Infrastructure
- Business & Investment
- Technology, Media & Telecoms (“TMT”)
- Real Estate
- Immigration & Private Client
- Hospitality & Leisure
What is the AfCFTA?
The AfCFTA is the world’s largest free trade zone and is a flagship project of the African Union’s Agenda 2063 which aims to boost intra-African trade, integration and development. It was established in 2019 and officially commenced operation on 1 January 2021, creating a single market of 1.2 billion people with a combined GDP of over US$ 3 trillion. It anticipates participation of all 55 member states of the African Union, 54 of which have already acceded to the agreement establishing the AfCFTA (the “Agreement”). The establishment and operation of the AfCFTA will take place in multiple phases, which are subject to ongoing negotiations to refine the details. Phase I, which came into effect this year, covers the rules governing trade in goods and services and a pervasive dispute resolution framework. Phase II focuses on the development of protocols on investment, competition policy and intellectual property rights. The recently added Phase III will involve the negotiation of an e-commerce protocol.
What are the key aims and objectives of the AfCFTA?
The AfCFTA aims to complement existing regional economic communities (“RECs”) and trade initiatives by creating a continent-wide regulatory framework. Article 3 of the Agreement sets out the general objectives of the AFCFTA, underlining the overall ethos of deepening the economic integration of the African continent and promoting socio-economic and industrial development. The core principles are outlined in Article 5 and includes commitment to transparency and disclosure of information, a most favoured nation policy and best practices for RECs and international conventions.
The scope and objectives of the AfCFTA are extensive and includes the reduction or removal of tariffs on 90% of intra-Africa traded goods and services within 10 years, simplified customs procedures as well as the establishment of sophisticated dispute resolution mechanisms.
What framework governs the AfCFTA?
The Agreement is the overarching agreement of the AfCFTA and provides for legal instruments such as protocols, annexes and appendices.
The institutional framework for implementation of the AfCFTA is outlined in Part III of the Agreement and consists of an Assembly formed of African Union’s heads of states, a Council of Ministers comprised of the ministers for trade of the state parties, a Committee of Senior Trade Officials and a Secretariat. The Secretariat, which will have a similar role to an agency of the African Union, is responsible for coordinating the implementation of the Agreement. The Dispute Settlement Body will be responsible for the dispute resolution regime. The RECs will also play an important role as well as institutions at member state level. Complementary institutions, such as the African Business Council for example, will also play a role by presenting the views of the private sector.
Why is the AfCFTA so significant?
The AfCFTA is anticipated to increase intra-regional trade by over 50% by 2030 (as estimated by the United Nations Economic Commission for Africa) and has the potential to transform the economic landscape across the continent.
Currently, Africa accounts for approximately 2% of global trade with only 17% generated from intra Africa trade, compared with other trade blocs (a reported 59% of trade generated from intra-regional trade within Asia and 68% generated from intra-regional trade within Europe). Predictions by the World Bank suggest that the Agreement could increase real income by 7% for Africa and add US$76 billion in income to the rest of the world by 2035.
The AfCFTA is expected to enhanced the African Union’s economic viability, creating jobs and business opportunities for its member states, citizens and businesses, and increasing earnings and competitiveness in the wider global marketplace.
How can businesses and investors benefit from the AfCFTA?
The introduction of AfCFTA’s tariff-free movement rules will allow African businesses to expand and transact across the Union’s member states in a cost-effective and efficient manner. Investors and businesses will be able to undertake their economic activities, governed by a single set of rules across the African Union, increasing transparency and business certainty.
Many businesses currently face higher tariffs when they export within Africa than when they export outside Africa and the AfCFTA is designed to address such issues. Businesses will be able to take advantage of the market without additional costs and regulatory burdens across borders within the African Union. We anticipate that this will present opportunities for new and more integrated supply chains that will result in cost savings for businesses and individuals.
The AfCFTA is also expected to create a ripe environment for the growth of start-ups and the development of small and medium sized enterprises. Businesses that struggle to penetrate global markets but are well positioned to access other African markets can benefit by using the AfCFTA as a route to initially expand in the continent and then to overseas markets.
Further, the AfCFTA is expected to create significant opportunities in the maritime, energy, infrastructure and TMT industries amongst other practice areas. Businesses and investors should also anticipate large-scale projects across Africa’s infrastructure to handle the increase in free movement of goods, people and resources. This will allow businesses to grow with scale and become more efficient in their African operations and beyond.
The AfCFTA and the COVID-19 Pandemic
The COVID-19 pandemic has caused nations to take extreme precautionary measures with unforeseen lockdowns and restrictions on travel and trade. The pandemic also disrupted the global economy and supply chains and paused the implementation of the AfCFTA. The pandemic exposed the fact that many African nations rely heavily on imports from other continents, especially for essential products such as medical equipment and food supplies. Despite the challenges that COVID-19 created for the AfCFTA, it could serve as a catalyst for regulatory and structural reforms.
In a post-pandemic world the AfCFTA could accelerate the recovery of the continent by facilitating economic integration within Africa, establishing regional value chains and encouraging local and foreign direct investment.
Whilst the AfCFTA still has some way to go to implement all the necessary legal instruments and frameworks to ensure that the single market is fully operational, its launch is a promising step in the right direction for Africa. The realisation of the objectives of the AfCFTA will rely on the dedicated commitment of all stakeholders. In addition to the governing institutions, private enterprises and investors can play a key role in shaping the implementation of AfCFTA and ensuring its success. If successfully implemented, the AfCFTA could revolution the economy of the continent.
If you have any questions about the content in this article or would like to discuss further, please do not hesitate to reach out here.