African Continental Free Trade Area (AfCFTA) - unifying for growth
Creating one African market
Hello all,
While over 60% of the goods the EU imports come from other EU states, within Africa it’s less than 15% of imports that come from other African states.
This highlights a significant difference in regional trade dynamics, underscoring the potential for growth in intra-African trade.
Therefore, the African Continental Free Trade Area (AfCFTA) is more than a trade agreement; it’s a promise of interconnected markets for trade and innovation with huge potential for economic development and job creation.
Which is why we want to shine a light on it today.
Let’s dive in.
🕐 In a Hurry? Here's a 1-Minute Summary:
Context: The AfCFTA is a landmark initiative aimed at creating a single market across 54 African nations to boost economic growth, innovation, and trade within the continent. Launched in 2018 and operational since January 2021, it's set to unify over 1.3 billion people and a GDP surpassing $3.4 trillion.
Vision: The AfCFTA is expected to lift 30 million Africans out of extreme poverty, increase the continent's income by $450 billion, boost intra-African regional trade by over 30% and foster significant job creation.
Sectors: Expected to significantly impact sectors like agriculture, manufacturing and the digital economy - manufacturing could double in size by 2025, driven by access to a larger regional market and job creation; And the digital economy can benefit from the AfCFTA’s focus on protecting intellectual property rights.
Challenges: Despite its potential and political will, the AfCFTA still faces significant hurdles in harmonizing standards and protocols across countries, addressing infrastructural gaps, and overcoming non-tariff barriers to truly capitalize on intra-African trade benefits.
Implications for investors: The AfCFTA signals a move towards more integrated and investor-friendly conditions in Africa, promising a large, more easily accessible consumer market, lower trade costs, and new opportunities for growth in diverse sectors.
⏳ Ready for a Deeper Dive? Here's the Breakdown:
Context: What is the AfCFTA?
The African Continental Free Trade Area (AfCFTA) represents a big step towards economic integration across the African continent.
Established by the African Continental Free Trade Agreement in 2018, the AfCFTA encompasses the majority of African countries, making it the world's largest free trade area by the number of participating countries.
With 54 states having signed the agreement, the AfCFTA aims to create a single, liberalized market for goods and services encompassing over 1.3 billion people and a GDP exceeding $3.4 trillion.
It commenced trading on 1 January 2021, with a permanent secretariat based in Accra, Ghana, to oversee its implementation.
The vision: Facilitate intra-African trade
Intra-Africa exports account for less than 15% - whereas in other world regions like the EU the intra-continental trade is well above 60%.
The AfCFTA is set to lower trade barriers, enhancing goods and services flow, which could stimulate economic growth, diversification, and innovation across the continent - and boost intra-Africa exports by more than 30%, significantly cutting the continent’s trade deficit.
The vision encompasses a more competitive Africa on the global stage, aiming for substantial poverty reduction, job creation, and inclusive socio-economic development.
The AfCFTA seeks to boost investment, technological advancement, and the development of regional value chains, potentially redefining Africa's global economic role and moving towards a prosperous, integrated, and united continent as envisioned in the African Union's Agenda 2063
Let’s make the African market, the market of Africans. Produce in Africa, transform in Africa and consume in Africa. Let’s produce what we need and let’s consume what we produce instead of importing - H.E. Thomas Sankara, President of Burkina Faso
The World Bank highlights the economic potential of the AfCFTA, noting its capacity to lift 30 million Africans out of extreme poverty and significantly boost the continent’s income by $450 billion.
💡💡Sector Spotlight: Who will gain?
🌾 Agriculture and Food
The agreement is expected to make African agriculture more productive, competitive, and sustainable.
The AfCFTA aims to increase agricultural efficiency and productivity by facilitating better access to markets across the continent. By removing tariffs and non-tariff barriers, the agreement opens up opportunities for farmers and agricultural businesses to export their products to a wider market.
Improved intra-African trade in agriculture could also enhance food security across the continent. By making it easier to trade agricultural products, countries can better manage food surpluses and shortages, reducing the risk of food crises and ensuring that populations have access to a stable supply of affordable food.
🏭 Manufacturing
The AfCFTA is expected to make access easier to vast regional markets encouraging the local production of goods, reducing reliance on imports.
This is expected to foster competitive manufacturing environments, and with successful implementation, Africa's manufacturing sector could double in size, creating 14 million stable jobs by 2025.
💻 Digital Economy and services
The AfCFTA aims to streamline cross-border e-commerce and create a harmonious digital landscape across Africa. This can open new doors for fintech, online retail, and digital services.
Another critical area is innovation, particularly in technology and intellectual property rights. The AfCFTA encourages policies that protect and promote innovation, vital for sectors like digital platforms, healthcare, and pharmaceuticals.
With Africa's youthful and increasingly educated population, fostering an environment conducive to innovation could lead to the development of new industries and enhance the continent's global competitiveness.
The agreement's focus on intellectual property rights will also be key to protecting innovations and fostering a culture of creativity across the continent
Implementation hurdles despite vast economic potential
A significant hurdle in the AfCFTA's implementation is aligning member states on diverse protocols and standards across sectors such as trade, competition policy, and intellectual property.
Also, the Regional Economic Communities - e.g., East African Community (EAC), Economic Community of West African States (ECOWAS) - are foundational components towards achieving the AfCFTA, but also introduce additional complexities in integrating regional and continental objectives.
Moreover, national readiness is critical, with countries still developing strategies to empower the private sector to truly capitalize on AfCFTA.
Practical trade barriers within AfCFTA, like insufficient trade infrastructure and access to digital platforms, further hinder effective cross-border commerce.
Additionally, non-tariff barriers, including different customs procedures and standards, pose significant challenges to realizing AfCFTA's potential in enhancing intra-African trade.
Why does it matter for investors?
The AfCFTA signals to investors that Africa is moving towards greater economic integration and creating a more conducive environment for business and investment.
It offers the promise of a larger, more unified market, reduced trade costs, and enhanced opportunities for economic diversification.
By creating a single market for goods and services across 54 African countries, the AfCFTA significantly increases the potential consumer base and market size for businesses.
Moreover, by reducing trade barriers and simplifying customs procedures, the AfCFTA lowers the cost of doing business across borders within Africa.
This makes it easier and more profitable for investors to establish operations in one country and serve markets across the continent.
The focus on diversifying economies and moving up the value chain, particularly in sectors such as manufacturing, agriculture, and services, opens new investment opportunities in areas poised for growth.
Additionally, the agreement's emphasis on digital trade and intellectual property rights is set to enhance the legal framework for business, providing more security and confidence for investors.
This is particularly important in the burgeoning tech and innovation sectors, where Africa shows considerable promise.
Sources to learn more:
Website of the AfCFTA
The Road to Africa’s Single Market: Progress so far and challenges for the future by Africa Policy Research Institute
The benefits of the AfCFTA for the African economy by the Borgen project
Discover AfCFTA by ITC Market Access Map
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Thanks for reading,
Carolin
Disclaimer: All information provided is not intended to serve as investment advice. Any mention of industries or countries should not be taken as an endorsement.