The African Continental Free Trade Area (AfCFTA) agreement has been postponed due to the impact of COVID-19 on the region. Once it eventually goes ahead, likely in 2021, the benefits of continent-wide free trade will be instrumental in Africa’s post-pandemic resilience and recovery. Virusha Subban, Partner specializing in Customs and Trade, explains why.
Despite the African Continental Free Trade Area (AfCFTA) having recently been postponed due the impact of COVID-19, it is expected that the benefits of continent-wide free trade will be instrumental in Africa’s resilience and recovery in a post-pandemic environment. The agreement, which was due to start in July this year, has been delayed by at least six months and will most likely only begin in 2021. The delay, however, is not expected to hinder the implementation of the agreement in the long run.
AfCFTA is a landmark deal that aims to bring together 54 African countries with a population of more than one billion people and a combined GDP of over USD 3 trillion. At a high level, AfCFTA is focused on stimulating growth, creating employment and diversifying economies across the African continent through the creation of a single African market for goods and services. Once the agreement’s ambitious goals are realised, it will help African member states establish new cross-border value chains, encourage foreign investment and better insulate the continent’s economies from future global shocks.
The Secretary General of the AfCFTA, Wamkele Mene, noted recently that no country could have anticipated the devastating global pandemic and its impact, and the delay in the start of AfCFTA was necessary to allow African governments time to address urgent health and economic crises in their countries. The African Union had planned to meet at a summit in South Africa at the end of May to finalise the procedures for beginning the free trade agreement and is said to be looking at ways to possibly move the summit online. Under current conditions, however, free trade across temporarily closed borders would not be possible.
International trade in Africa has been heavily impacted in the last few months by both a global reduction in demand for products and a decreased supply of key components from China, Europe and other regions. Access to skilled workers has also been impacted by numerous government lockdowns and travel bans around the world. According to Baker McKenzie’s research, compiled in conjunction with Oxford Economics, AfCFTA's USD 3 trillion Opportunity (AfCFTA report), manufacturing products, industrial machinery and transport equipment constitute over 50% of Africa's import needs, with the most important suppliers being Europe (35%), China (16%) and the rest of Asia including India (14%). Supply chain disruptions in these regions severely impacted Africa’s ability to access essential products and components in the first part of 2020.
Further, a new report from Baker McKenzie and Oxford Economics, Beyond COVID-19: Supply Chain Resilience Holds Key to Recovery showed that the pandemic has produced an unprecedented global supply chain crisis, due primarily to the creation of temporary 'manufacturing deserts', whereby a city, region or whole country's output dries up so substantially due to lockdown conditions, they become a no-go zone to source anything apart from essential items such as food stuffs and pharmaceuticals. However, while the effect of COVID-19 on Africa’s trade has been detrimental, supply chain disruptions are expected to be mostly short term. Further, the continent’s overreliance on outside imports has further highlighted AfCFTA’s intraregional trade benefits.
In addition to the challenges to trade brought about by COVID-19, Africa’s inadequate infrastructure, numerous corruption and security issues, poor trade logistics, onerous regulatory requirements, and complex customs procedures have all threatened to hamper the progress of the AfCFTA. These issues must be addressed in order for seamless trade across African borders to be possible. According to our AfCFTA report, reliable transport infrastructure is vital for businesses to be able to scale up production for regional export or to develop manufacturing bases. The continent also needs to redouble efforts to ensure that an adequate supply of water and electricity is available so that free trade across borders in Africa is successful. Additional investments in utility infrastructure will also incentivize foreign companies to set up production facilities on the continent. Post-COVID-19, investors will be looking at countries where it is easy to do business and transport goods to other African markets.
It is hoped that the impact of COVID-19 will provide further impetus for African governments to overhaul regulation relating to tariffs, bilateral trade, cross-border initiatives as well as capital flows – which will allow for the efficient implementation of AfCFTA, once it is able to go ahead. Domestic policies will also play a crucial role in alleviating some of the current trade barriers that are not related to tariffs (such as corruption, infrastructure development and security threats). Further, the substantially increased focus on the already essential role of digitisation means that the development and harmonisation of a regulatory framework to integrate Africa’s digital economies is now essential. A sophisticated legal and regulatory framework that enables digital transactions is vital for full participation in global digital trade, which is expected to play a leading role in a post-COVID-19 trade environment.
However, to protect their countries from the impact of COVID-19, many governments have adopted temporary policies that discourage integrated trade, such as implementing export restrictions, curtailing the movement of goods and closing borders. The World Bank responded by issuing a Guidance Note on the do’s and don’ts of trade policy in response to COVID-19, noting that maintaining trade flows was crucial to economic recovery. The Bank noted that free trade was necessary to ensure access to essential supplies, food and agricultural products, for example, and that it was vital for continued economic activity and employment. It stated that a disruption in global and regional value chains would lead to an increase in poverty.
The World Bank’s guidance stated that the focus should be on encouraging intraregional trade flows and implementing favourable tariff agreements for essential items, as well as ensuring that temporary export restrictions were targeted and proportionate. Further, COVID-19 has led to a heightened focus on sustainability, including workforce health, with more attention being given to environment, social and governance issues in transactions. Such policies could help the continent pave the way for a more integrated, collaborative approach to trade, and aid in streamlining AfCFTA’s pending implementation.
A successfully implemented free trade agreement will help African economies heal and will provide a necessary boost to the COVID-19-embattled continent. The implementation of AfCFTA will provide the opportunity for African countries to diversify their economies, scale production capacity and widen the range of products made in Africa, in particular boosting the production of manufactured goods. Closer integration of neighbouring economies is one potential avenue for creating scale and competitiveness through domestic market enlargement, thereby promoting development through greater efficiency. This relates to both intraregional trade and trade with non-African nations. Taking a longer view, regional trade cooperation could potentially become a successful vehicle for connecting the region’s wealthier and poorer nations.
Post COVID-19, countries in Africa therefore need to ensure sustainable policies are in place to manage disruption, welcome investment and encourage integrated trade and collaboration across borders. The eventual free flow of trade across all 54 member states will put Africa in a much stronger economic position to weather future storms.