African nations are planning to set up a Continental Free Trade Area (CFTA) by the end of 2017. This would create a single continental market for goods and services, and free movement of business persons and investments, accelerating the establishment of a continental customs union. Leaders at the African Union Summit agreed to this plan during a meeting in Addis Ababa, Ethiopia, in January 2012 and the CFTA forms part of the Agenda 2063.
But how is a CFTA beneficial to African economies? And how far has the plan gone?
A CFTA is aimed at raising the low levels of intra-African trade, which represents only 13% of total trade in Africa. The expectation is to boost trade to the levels of other trade areas such as ASEAN (30%), NAFTA (40%) or the EU (60%). So far, the big expansion in real GDP experienced in sub-Saharan Africa since 2009 (average growth rate of 4.5% per year) has been accompanied by large current account deficits (average -3.3% per year).* Lifting intra-African trade would correct this imbalance without slowing economic growth. Besides, a high volume of trade among sub-Saharan African countries would incentivize much-needed infrastructure improvement, and positively impact productivity in the medium and long run through higher competition exposure of local firms.
In the previous meeting, held in Kigali in February, technical working groups met to track the evolution of this process. They focused on trade in services; non-tariff barriers and technical barriers to trade; sanitary and phytosanitary issues; rules of origin; legal and institutional affairs; trade remedies; and customs procedures and trade facilitation.
Despite the noticeable progress, there are inevitable challenges associated with the unequal distribution of gains among members, which could eventually aggravate their economic imbalances. It’s also important to note that in Africa there are already a number of regional economic communities at different stages of integration (see the post The African Economic Community). A successful harmonization of existing trade arrangements will be needed for the CFTA’s ultimate success.
Any comments on the feasibility of these ambitious goals?
* Data source: Regional Economic Outlook
Nadim Elayan, Research Assistant at IESE Business School, collaborated in this article.