New opportunities for accelerating pan-African trade

14 December 2021

By Rebeca Grynspan, Secretary-General of UNCTAD

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The African Continental Free Trade Area (AfCFTA) has opened a new chapter for the continent and rekindled hopes for recovery through trade in a post COVID-19 world.

As nations continue to battle a pandemic that does not respect national borders, the $3.4 trillion borderless market created by the AfCFTA presents an opportunity to reduce COVID-19 induced growth contraction, poverty and inequality trends, and spur sustainable and inclusive growth on the continent.

Intra-African trade is currently low at 14.4% of total African exports. UNCTAD estimates that the AfCFTA could boost intra-African trade by about 33% and cut the continent’s trade deficit by 51%.

Economic growth

Before the pandemic hit, the continent had experienced rapid economic growth, but it was hardly inclusive – the gains were not distributed fairly across society. Economic growth can only be inclusive if it reduces both poverty and inequality.

Our latest Economic Development in Africa Report 2021 shows that Africa’s unprecedented growth in the 2000s has not translated to significantly improved livelihoods for most Africans, as the income gap between the rich and the poor has widened.

About 34% of African households live below the international poverty line ($1.9 per day), and around 40% of the total wealth is owned by approximately 0.0001% of the continent’s population, according to the report. The pandemic has exacerbated inequalities and vulnerabilities of marginalized groups, resulting in an additional 37 million people in sub-Saharan Africa living in extreme poverty.

A key question is how economic growth through regional integration can contribute to poverty reduction, cut inequality, and foster inclusive development, a main objective of the African Union’s Agenda 2063.

Our report shows that the continent’s free trade area can deliver considerable inclusive economic growth for Africa’s 1.3 billion people, but it needs measures to boost productivity and expand opportunities, as these gains will not come automatically.

Trade policies alone are unlikely to support inclusive economic growth on the continent. Other required measures include cooperation in promoting investment and competition policies, accelerating financing of infrastructure that facilitates rural-urban linkages, and providing equal access to socio-economic opportunities and productive resources.

The AfCFTA needs stronger support measures targeting women, who make up the largest share of informal traders, representing 70% to 80% in some countries, the youth, small businesses, and cross-border traders, as these groups have experienced a complete depletion of their savings due to pandemic-induced restrictions.

Informal cross-border trade can account for up to 90% of official trade flows in some countries and contribute to up to 40% of total trade within regional economic communities such as the Southern African Development Community and the Common Market for Eastern and Southern Africa.

Untapped $22 billion opportunity

Our data show that the continent’s current untapped export potential amounts to $21.9 billion, equivalent to 43% of intra-African exports. An additional $9.2 billion of export potential can be realized through partial tariff liberalization under the AfCFTA over the next five years.

To unlock the untapped potential, various intra-African non-tariff barriers, including costly non-tariff measures, infrastructure gaps, and market information gaps, need to be successfully addressed. This requires joint efforts under the AfCFTA.

In addition, long-term cooperation in investment and competition policies will be essential to overcoming market dominance by a few actors and to reducing structural and regulatory barriers to market entry.

Intra-African trade comprises 61% processed and semi-processed goods, suggesting higher potential benefits from greater regional trade for transformative and inclusive growth.

UNCTAD’s most recent Review of Maritime Transport 2021 shows that the AfCFTA could also boost maritime trade in Africa, as it’s expected to raise demand for different modes of transport on the continent, which will in turn increase investment requirements for infrastructure and equipment – ports and vessels in the case of maritime transport.

But to fully realize the benefits of the AfCFTA, we must address the critical need to finance and develop adequate infrastructure and services in Africa to support maritime connectivity.

Promise of regional value chains

The reconfiguration of global value chains amid the pandemic will have profound implications for inclusive and sustainable economic growth on the continent.

The pandemic is an inflection point in a shift towards a new more localized global economic geography with shorter, greener and more regional value chains, greater digitalization and a lighter global production footprint.

Under the AfCFTA, the continent can develop and strengthen regional value chains and offer countries an opportunity to use regional advantages to boost competitiveness, diversify product supply, and export products with higher value-added, helping cushion Africa from future economic shocks.

Globalization trends are also being accompanied by a shift to more intangible, more digital, and more services-led value chains. African countries need therefore to look carefully at how they create and capture value from their engagement with each other and the wider world.

The AfCFTA’s success will hinge on its ability to put in place simple, transparent, and predictable rules that can help create more viable region-wide value chains, closer to home across the African market.

Prospects are good for viable African value chains in industries like tea, cocoa-chocolate, cotton-apparel, beverage, cement, and automotive, as well as for creative, pharmaceutical, and other industries that offer paths towards economic diversification.

Changing the game for industry

The continent’s free trade area must be a game-changer for pan-African industry. A focus on more intra-African trade in industrial goods promotes African industrialization and the advancement of its manufacturing sector, providing more employment opportunities for the continent’s booming youth population.

Also critical is enhanced pan-African collaboration in science, technology, and innovation, which will play a key role not only in the COVID-19 recovery plans, but also in the decade of action to deliver on the 2030 Agenda for Sustainable Development.

The AfCFTA can also galvanize regional collaboration to tackle the scourge of illicit financial flows, which generate nearly $90 billion in lost financing from Africa every year, accounting for nearly half the Sustainable Development Goals investment gap in the region.

This article was first published in the East African on 14 December 2021 and republished with permission.