Growing together: policy considerations for the African Continental Free Trade Area

The 2021 Agreement Establishing the African Continental Free Trade Area (AfCFTA) is a transformative policy initiative that seeks to integrate markets across 54 African economies. It is expected to support African economies achieve rapid industrial development, diversify their export baskets and make progress towards the UN Sustainable Development Goals (SDGs).

The recently resumed negotiations between AfCFTA economies are also ambitious in scope, extending beyond tariff elimination in goods to also cover regulatory issues concerning competition, services trade, intellectual property, and digital trade. As of February 2023, 46 signatories have deposited their instruments of AfCFTA ratification.

In what ways can such reforms bolster regional trade and economic growth on the African continent? This was the central question of a recent conference organised jointly by the EUI and the United Nations Conference on Trade and Development (UNCTAD). Drawing upon discussions at this meeting and findings from empirical research, we highlight here three key dimensions of growth-enhancing policy for AfCFTA economies.

Eliminating non-tariff barriers

Given the AfCFTA’s emphasis on economic integration, we first assess how the agreement might address the persistently low levels of intra-Africa trade (Figure 1). Chowdhry et al. (2022) examine this issue by simulating the agreement’s impact under different hypothetical implementation scenarios using a state-of-the-art quantitative trade model.

The study finds that tariff elimination alone (among AfCFTA members) is not sufficient to boost the bloc’s global exports or intra-Africa trade. Moreover, tariff reductions deliver only a marginal increase in the bloc’s aggregate income and output, as export gains are offset by the loss of tariff revenues. In contrast, a 10% reduction in non-tariff barriers (NTBs) on trade within AfCFTA increases the bloc’s global exports by 17% and intra-AfCFTA exports by 23%.

This positive impact is further magnified if the AfCFTA lowers trade frictions more broadly – for instance, by improving customs procedures, transparency and regulatory predictability. In this scenario, AfCFTA’s global exports rise by 22.9%. Overall, the study finds that the trade gains from AfCFTA are far from automatic and depend crucially on members’ willingness and capacity to lower NTBs substantially and irreversibly.

Figure 1: Composition of trade flows for AfCFTA economies.

Note: Lines trace export destinations and import origins of AfCFTA economies over time. Source: Chowdhry et al. (2022).

 

Unleashing the digital economy

The negotiations of the Digital Protocol as part of the AfCFTA will be an opportunity for African countries to establish common positions on digital trade and harmonise regulations across the region to leverage the opportunities offered by the digital economy. The recently launched Digital Trade Integration Database (DTI) contains digital trade policies implemented in 29 African economies and collected in collaboration between the EUI and the UN Economic Commission for Africa (UN-ECA).

The database contains comparable information across 65 indicators in 12 policy areas and includes measures that can impede digital trade as well as measures that can enable digital trade. The heterogeneity across countries in the region is striking (Figure 2). Some, like Egypt and Nigeria, are very active in restricting digital trade. The restrictions appear mostly to be guided by public-order and infant-industry arguments.

In contrast, some countries have implemented numerous enabling policies, such as consumer and data protection laws, and have joined international agreements that are conducive to digital trade such as the WIPO Internet Treaties and the UN Convention on Electronic Commerce. The most active countries in the region are Ghana, Uganda, Morocco, and Togo.

Figure 2: Restrictions vs enabling measures on digital trade in African countries, 2022.

Source: Digital Trade Integration Database, European University Institute.

 

Our analysis also reveals heterogeneity across each policy area. Overall, the countries in the region tend to impose fewer restrictions on ICT goods (especially in the form of quantitative trade restrictions and standards) and on foreign direct investment, while they are more active in regulating the telecom sector and public procurement. A study under way at the EUI uses gravity model analysis to explore the potential gains from harmonising regulations. The analysis confirms that the digital trade policies contained in the DTI are negatively correlated with digital trade and shows that the impact of trade restrictions is higher when the regulatory heterogeneity is lower. That is, improved regulatory harmonisation has a greater impact on digital trade when the regulatory environment is more open.

Domestic policies to complement regional cooperation

To maximise Africa’s growth potential, regional cooperation must be complemented with growth-enhancing fiscal policies that member countries can pursue independently. Government procurement is one such mechanism through which a member state can encourage private-sector firms’ growth by stabilising demand for their output. The role of government procurement in Africa is especially critical since many African countries like Botswana, Kenya, Angola, South Africa, and Egypt spend over 20% of their GDP on procurement. (This level of expenditure is also significantly higher than the 13% average for the world’s low-income countries.) It is therefore important to examine whether government procurement can enhance private-sector growth and expansion in Africa.

Hoekman et al. (2022) does just this, using firm-level data from Uganda. The findings show that compared to firms that do not sell to the government, firms that participate in procurement experience a significant increase in sales and labour productivity (Figure 3). However, firms that sell to the government also report a long-term reduction in sales to other, private buyers. The reallocation of sales from the private sector is also stronger among sectors with a higher capital requirement.

These results suggest that firms benefitting from government procurement do not expand fully due to capacity constraints or to difficulty in obtaining loans from the financial sector. Easier access to credit can help reduce these obstacles.

Figure 3: Government procurement and firm performance in Uganda.

Note: The figure’s panels show the difference in evolution of a) sales; b) sales per employee; c) sales excluding government buyers; and d) capital to labour ratio, between firms that enter procurement and firms that do not enter procurement, around the timing of their participation in procurement (Year=0). Source: Hoekman et al. (2022).

 

Moving forward, focusing on implementation

AfCFTA members collectively represent one of the largest trading blocs in the world, encompassing more than 1.3 billion consumers with a combined GDP of USD 3.4 trillion. Tracking implementation outcomes under the AfCFTA will be essential if members are to fully realise the benefits of such market integration. Monitoring potential distributional effects of the agreement can also inform policy discussions among members that are at different stages of economic development.

In conclusion, we recommend that members also look towards best practices and the experience of implementing existing trading arrangements in the region such as the Southern African Development Community (SADC) and Common Market for Eastern and Southern Africa (COMESA) for making progress on the AfCFTA.

 

Sonali Chowdhry is an economist and Max Weber Postdoctoral Fellow at the Robert Schuman Centre’s Global Governance Programme. Her research examines the distributional effects of trade policy and the structure of global value chains.

Martina F. Ferracane is a Research Fellow at the Robert Schuman Centre’s Global Governance Programme and coordinator of the Digital Trade Integration Project (DTI), supported by CIVICA Research. In 2022 she was selected as an ‘Atlantic Dialogues Emerging Leader’.

Rohit Ticku is an economist and a Research Fellow at the Robert Schuman Centre’s Global Governance Programme.