As the African Union embarks on its most ambitious project—creating the largest free-trade area in the world—we have some questions.
On 29 April, the Chairperson of the African Union (AU) Commission, Moussa Faki Mohamet, received the ratifications from Sierra Leone and the Saharawi Arab Republic for the African Continental Free Trade Agreement (AfCFTA). With these, the minimum number of ratifications was reached for the Agreement to enter into force. Faki hailed the ratifications as a milestone, representing a substantial step in eliminating the fragmentation of African economies. AfCFTA entered into legal operation on 30 May 2019. It will come to market on July 7, 2019.
The AfCFTA is a project of the AU to create a continental economic bloc. This free trade agreement, its promoters argue, has the potential to boost intra-African trade by more than 50 % through the elimination of tariff and non-tariff barriers on trade. Through a single undertaking, AfCFTA seeks to achieve the elimination of most intra-African trade barriers at once.
As Quartz Africa reported after the agreement came into effect: “…In a nutshell, it means a single market of goods and services for 1.2 billion people with an aggregate GDP of over $2 trillion. UNCTAD, the UN’s trade body, predicts reducing intra-African tariffs under AfCFTA ‘could bring $3.6 billion in welfare gains to the continent through a boost in production and cheaper goods’.”
With average tariffs above 6 %, African businesses already face higher costs when they export within the continent than when they export to the rest of the world. By gradually eliminating tariffs on intra-African trade, AfCFTA seeks to make it easier for African businesses to exchange within the continent. AfCFTA is also expected to benefit Africa’s industrial exports by diversifying trade and encouraging a move away from commodities.
Officially, AFCFTA has its roots in an old Pan-African aspiration—namely, that African countries no longer import from Europe, but from other Africa partners. Several commentators from the continent have hailed the Agreement, seeing it as a “game changer” that will put “Afro-pessimists” on the ropes. This enthusiasm has also been echoed by international organizations, such as the United Nations Conference on Trade and Development (UNCTAD).
Intra-African commerce is currently meager, representing only 10 % of the continent’s total trade. The main impediment is transport and logistics costs. These infrastructure disadvantages reinforce other structural deficiencies, like the excessive reliance on commodities and the divergence of economic development.
One could hardly be against such a laudable goal such as increasing intra-African commerce. However, praiseworthy as it may be, one must question whether this quintessential neoliberal policy will be the most effective tool to achieve it—and what costs will be borne by African peoples. Three crucial issues need to be addressed concerning AfCFTA: (a) the vast disparities in the size and composition of African economies; (b) the differing ways in which African countries have integrated themselves to the world economy; and (c) the African nations’ ability to switch to less commodity-based exports.
With regards to the existing economic disparities within the continent, even the World Economic Forum acknowledges that a significant challenge in the harmonization of African economies is the wide variation in their levels of development. AfCFTA has the highest levels of income disparity of any regional free trade agreement, doubling the levels present in blocs such as the Association of Southeast Asian Nations (ASEAN). For example, whereas over 50 % of Africa’s cumulative GDP is contributed by three countries (Egypt, Nigeria, and South Africa), Africa’s six island nations contribute just 1 % combined. As for Europe, Africa Check also reminds us that it has taken more than 60 years after the signing of the Treaty of Rome (1957) to create a European common market; furthermore, the European Union devotes almost a third of its budget to finance structural and cohesion funds, enabling the least developed member States to reduce their gap with the EU15. No such mechanism is envisaged for AfCFTA.
In fact, the economic diversity explains the different responses that African countries have had regarding AfCFTA. South African leaders, for instance, have expressed their full support for the trade bloc, as AfCFTA could particularly favor South Africa in terms of manufacturing exports. For example, South Africa’s automotive sector, which currently represents 58 % of the country’s total manufacturing output and almost 7 % of its GDP, is likely to expand as a result of the continental free trade area.
Other African nations have not been so eager to ride the free trade bus. Currently, there is much discussion in Nigeria about AfCFTA’s implications for employment and the potential damage to the Nigerian economy. Despite strong support for AfCFTA coming from many business leaders and commentators, Nigeria—the largest African economy in terms of GDP size—is yet to join the free trade bloc.
African leaders might have MERCOSUR or even the European Common Market in mind when thinking of AfCFTA, but the level of economic divergence amongst African economies is much more similar to that found in a different free trade bloc: NAFTA. And when it comes to disparities, NAFTA’s record offers valuable lessons for African countries—especially the least industrialized.
In the case of Mexico, the poorest member of the bloc, as a result of NAFTA, real wages decreased, GDP per capita barely rose, and labor conditions did not experience a significant improvement. As one study points out, Mexican wages in some industries were five times lower than in the U.S. before NAFTA; yet, even as U.S. wages stagnated, Mexican wages became nine times lower after NAFTA. In fact, NAFTA’s labor standards proved entirely ineffective, creating race-to-the-bottom incentives for U.S. firms to outsource production.
In the case of agriculture, between 2 and 4.9 million Mexicans engaged in agricultural activities became net losers from the free trade agreement, as NAFTA eliminated not only Mexican tariffs on corn and other commodities, but also other policies that supported small farmers. For Mexico, NAFTA has meant a four-fold increase of exports as a percentage of GDP, while making Mexico a manufacturing powerhouse in Latin America; but it has also meant the creation of a trade bloc in which its weaker member’s exports remain with low value-added, unable to diversify trade beyond the United States, which now concentrates almost 90% of Mexico’s foreign trade. If anything, because of the disparities between the United States, Canada, and Mexico that proved beneficial to certain conglomerates, NAFTA exacerbated the decline in working conditions and labor rights in each country, to the benefit of a few, concentrated sectors.
This history of this free trade area established in a context of substantial economic disparities must serve as a warning to African nations in their efforts to establish a similar scheme on a continental scale. As with NAFTA, there are no guarantees with AfCFTA that companies will refrain from threatening to outsource to other countries with a cheaper labor force, which would further weaken workers’ bargaining power and contribute to the widespread stagnation of wages.
Even though any comparison with NAFTA might seem far-fetched, considering that nations such as Nigeria and South Africa are not close to having the economic power of the United States, NAFTA’s lessons should not be discarded by Africa’s small economies. In comparative terms, the levels of economic disparity found amongst African countries are just as high as those found in Northern America. There is one important difference, however, when drawing comparisons between AfCFTA and NAFTA: Mexico already had a sizable industrial base when NAFTA entered into force; this is hardly the case with many African nations.
The other area of concern is the integration of African nations to the world’s economy. Despite the AU’s efforts to boost economic integration through the establishment of Regional Economic Communities (RECs), African economies continue to trade mostly with other partners outside of Africa. RECs have proven unable to facilitate and enhance intra-continental trade, in no small part due to the different trade agreements already in place between African countries and their partners in the developed world. This is especially the case with the European Union, which has already signed economic partnership agreements with several RECs. The vast presence of multinational firms in Africa has served to maximize the economic relations with Western countries even further, to the detriment of intra-regional trade. Instead of fostering continental integration, AfCFTA has the potential to hinder it even further, by facilitating benefits to those multinational firms already present in most African countries, as these firms will even have more incentives to concentrate their activities in the most competitive countries.
In other words, because of the current trade patterns of African nations and the presence of transnational firms, AfCFTA would serve to facilitate the movement of extra-African products—imported mainly from Europe—across Africa. The prospects of subsidized agricultural products from the EU spreading throughout sub-Saharan Africa are grim if one considers that African farmers make up more than half of the total labor force in this region. With this in mind, it is not difficult to see AfCFTA as merely creating a large African market, but with relatively few African products traded.
The third area of concern has to do with the ability of African nations to diversify their export bases, transitioning from commodities to high value-added products. But for this to happen, industrialization policies are key. Despite the “Africa Rising” narrative that started getting a foothold some years ago, no effective industrialization policy has been put in place. What is more, the share of manufacturing in the GDP in most African countries has actually declined in the last decades; if anything, the vast African labor force has moved out of agriculture in large numbers, but the beneficiary has not been manufacturing but services (the former sector admittedly less productive than the later). In the absence of strong industrial development policies, AfCFTA is not likely to induce the export diversification that its proponents argue.
To some extent, AfCFTA has the potential to contribute to the economic growth of Africa, to the creation of employment, and the reduction of poverty in the continent—but all will depend on the ability of each country to restructure their respective economies. The economic disparities among the 55 African nations suggest that the implementation of AFCFTA will be more challenging than expected. Many analysts already acknowledge that it will take time to reach tariff elimination agreements and adequate protocols to enhance intra-continental trade. As mentioned earlier, because of many structural deficiencies, the success of the African common market is linked to the construction of physical infrastructure and connectivity, as well as the creation of jobs and the integration of markets.
However, the near absence of such discussions in African policy-making circles when it comes to AfCFTA is disturbing. As the World Economic Forum further acknowledges, the lack of a comprehensive policy-making and preferential treatment for Africa’s most at-risk economies can make AfCFTA a driver (rather than an inhibitor) of increased economic divergence. UNCTAD already admits that countries will bear some tariff revenue losses and adjustment costs in the short-run, which may not be distributed uniformly across the continent. Others predict that several countries in Africa would become poorer in real income after the creation of the AfCFTA, as a result not only of losses in tariff revenues but also of the intensification of competition, coupled with the rise in world food prices.
International trade is not neoliberal per se. The idea of an African market was envisioned long before the emergence of neoliberalism. Kwame Nkrumah was one of the most avid advocates of an African common market, writing extensively on the subject; Walter Rodney lamented the lack of “integration of the markets across large areas of Africa.” However, Pan-African intellectuals spoke of an African common market, arguably different to what merely constitutes a free trade area. Furthermore, the fulfillment of this aspiration through AfCFTA is being carried out in a context of neoliberal globalization, in which deregulation, financialization, and rising corporate power are still rife.
Earlier Pan-African ideals were not only aimed at improving standards of living for the majorities; they were also aimed at reducing the inequalities amongst African countries in production and access to world markets. As Nkrumah put it, the prospective African common market had “to eliminate the competition [existing] between us,” beating “the undercutting tactics of the buyers who set us one against the other.” Conversely, AfCFTA is taking place in a context of limited or non-existent redistributive policies, with many African leaders openly embracing the neoliberal consensus.
In all likelihood, AfCFTA will definitely boost intra-African trade. The AU will have to finalize the work on AfCFTA’s support instruments—rules of origin, monitoring, digital commerce, electronic payments and establishing the African Trade Observatory—in order to launch the operational phase of the free trade area.
Yet it remains to be seen how beneficial AfCFTA will be to African nations and peoples, taking into account its limitations. Without a minimum of redistribution among African states, as well as heavy investments in industrial and transport infrastructure, purely trade integration attempts may only marginalize the least competitive African States and regions. More importantly, it remains to be seen how this free-trade area will serve to foster the Pan-African ambition of a continental bloc that will no longer have to import from the Global North.