Does Africa Need A Free Trade Area?

Does Africa Need A Free Trade Area?
Africans need to buy more African-manufactured goods and stop sending their money to Asia

AFRICANGLOBE – Like a true phoenix, Africa is rising from the ashes of despondence and wretchedness and, as validated by the rest of the world, is seeing an absolutely unprecedented explosive growth and economic development driven by socio-political stability, the rise of the middle class citizen, and the seemingly sudden realization by international investors that the continent offers some of the highest returns on investment in the world. Consequently, Africa has been dubbed the last development frontier and the place for all global businesses to expand to if growth remains their objective. The continent is not without its woes, most significantly the huge infrastructure deficit, but its story is now more promising than at any previous point in its history.

In 2012, African leaders, under the umbrella of the African Union (AU), decided the next big thing for Africa was a Continental Free Trade Area (CFTA) to be fully set up by 2017, and significant effort has gone into implementing this.

“Enhancing this trade – such as through a large continent-wide trade deal – and deepening market integration can contribute significantly to sustainable economic growth, employment generation, poverty reduction, inflow of foreign direct investment, industrial development, and better integration of the continent into the global economy,” the AU declaration stated.

A valid reason for pursuing this is the well-known regional integration argument and the need to boost intra-African trading. The World Trade Organization (WTO) says Intra-African trade currently stands at 12% of total trade, compared to 60% for Europe, 40% for North America, and 30% for ASEAN. Seeing that there is a direct relationship between the intra-regional trading (IRT) index of a region and its economic development, the AU took this stance; but there may be more fundamental issues to address before plying the route of a Continental Free Trade Area.

According to Princeton University, a Free trade area is a type of trade bloc, a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most or all goods and services traded between them; it can be considered the second stage of economic integration in between a preferential trading area and customs union. As economic integration increases, the barriers of trade between markets are expected to diminish thereby facilitating a free flow of people, goods and services. It is this end state that the African Union is looking to transit to by the creation of a Continental Free Trade Area.

Following its convictions, the AU had set up a Continental Task Force (CTF) to facilitate the CFTA, and full negotiations are expected to hold between 2015 and 2016 in line with the core objectives of the CFTA. These objectives include creating a single continental market for goods and services, with free movement of business persons and investments, thus paving the way for an accelerated establishment of the Customs Union. Another objective is the expansion of Intra African trade through better harmonization and coordination of trade liberalization and facilitation and instruments across the Regional Economic Communities (RECs) and across Africa in general. Lastly, the CFTA is expected to enhance competitiveness at the industry and enterprise level through exploitation of opportunities for scale production, continental market access and better reallocation of resources.

The United Nations Economic Commission for Africa (UNECA) calculates that the CFTA could increase intra-African trade by as much as $35 billion per year, or 52% above the baseline, by 2022. As a result, imports from outside of the continent could decrease by $10 billion per year, and agricultural and industrial exports would increase by $4 billion (7%) and $21 billion (5%) above the baseline, respectively. If coupled with complimentary trade facilitation measures to boost the speed and reduce the cost of customs procedures and port handling, the share of intra-African trade would more than double over the baseline, to 22% of total trade by 2022. These findings were published by the International Centre for Trade and Sustainable Development (ICTSD).

There is definitely the case for a regional integration ambition of this magnitude, but as hinted earlier, there is a horse that should come before the free trade area cart, and this is the issue of financial leakages and illicit financial flows. A more prudent and timely short term goal, that deserves a concerted and continental effort, should be to curb illicit financial outflows from the region. Africa may very well be losing the equivalent of what it gets in terms of foreign direct investment (FDI) every year due to these leakages, meaning there may be less need for investments if these holes are plugged.

The ECA asserts that Africa has lost $50 billion every year in the last decade to such leakages; this is almost the same amount of money it has received in terms of official development assistance. If this is really the case, Africa can be its own financial powerhouse if it successfully plugs in all the leakages. Also, estimates from various recent studies including “Financing Africa’s post-2015 development agenda” reveal that, from 1970 to 2008, Africa lost somewhere between $854 billion to $1.8 trillion in illicit financial flows. Definitely, this undermines revenue generation and reduces the benefits from economic activities, particularly in the extractive sector. It also undermines Africa’s ability to mobilize resources generated by such sectors to fund developmental goals.

Africa has become a net exporter of capital to the rest of the world because of illicit cash outflows, which equals about 5.5% of its GDP. These figures are alarming and all point to the same thing; we have a big financial worm inside Africa, and it may be worthwhile and more prudent to deworm the continent first of all before pushing for a Continental Free Trade Area.

 

 

By Emmanuel Iruobe