BY: ALEXANDRA CALLOWAY-NATION
The signing of the African Continental Free Trade Agreement (AfCFTA) occurred at a summit of the African Union in Kigali, Rwanda on March 21st. It is poised to be the largest trade agreement signed into force since the World Trade Organization was established in 1994. The $3 trillion agreement, which will encompass 1.2 billion people in 55 countries, will boost intra-African trade by creating a continental free-trade zone. Only 44 of the 55-member states initially ratified the agreement with the continent’s two largest economies, Nigeria and South Africa, noticeably absent. South Africa fulfilled its pledge to ratify the agreement at the most recent African Union summit held at the start of July. But Nigeria will lose out on the benefits of the agreement it if is not able to address domestic challenges from its powerful manufacturing sector, particularly the Manufacturers Association of Nigeria (MAN). Despite these setbacks, AfCFTA has the potential to bring far-reaching benefits to Africa through promoting its domestic manufacturing sectors.
Manufactured goods are much less vulnerable to fluctuating global prices than extractive goods, and are more frequently produced by small and medium-sized enterprises (SMEs) which make up about 80% of all businesses in Africa. AfCFTA’s goal of boosting intra-African trade is focused on four areas that have the potential to have a direct, positive impact on Africa’s domestic manufacturing sectors: cutting tariffs, lowering regulatory burdens to trade, creating a regulatory framework including a dispute settlement mechanism, and encouraging infrastructural investments.
AfCFTA eliminates tariffs on 90 percent of goods while allowing countries to designate 10 percent of goods as “special products” subject to higher levels of protection to be eventually phased out as well. This will not prove to be as useful without also lowering other regulatory burdens; in particular, by simplifying rules of origin and customs procedures, goods can be exchanged faster and more securely across borders. Currently the exporter takes on a great deal of risk by going through corrupt official (and unofficial) channels as there are no uniformly enforced licensing procedures, leaving goods at risk of being seized or profits slashed by corrupt government officials and border guards.
The dispute settlement mechanism within the agreement creates a platform for affected parties to have their complaints heard. A credible dispute settlement mechanism is essential to develop the trust needed for the system to function. Many signatories, and countries that have yet to ratify the agreement, fear that the dumping of cheap goods produced elsewhere in the African Union or imported from abroad will harm their domestic industries. This mechanism is vital to ensure AfCFTA does not do more harm than good for Africa’s budding manufacturing sectors.
Increased regulatory integration creates greater incentive to build infrastructure, particularly with trading partners like China, who has already made significant investments in African economies and will now see greater returns on investment as a result of this agreement. The greatest obstacle for increased intra-African trade, and thus a sustainable manufacturing sector in each country, is the fundamental lack of infrastructure to connect each country and more easily facilitate trade. As a result of this deficiency, most African countries export more to the EU than they do to their neighbors. This basic lack of infrastructure has not gone unnoticed. China has taken keen interest in the economic development of any country that is open to its investments. China sees Africa as the final stop along its Belt and Road Initiative and its influence can be seen at every level of African political and economic activity, from the funding to build the African Union headquarters in Addis Ababa, Ethiopia, to numerous transportation, telecom, and energy projects across the continent. China’s top legislator, Li Zhanshu, visited the African Union headquarters in May, where he reiterated China’s continued support for the African Union’s efforts towards greater regional integration, while also committing to play a larger role in its regional and international affairs.
Creating a robust manufacturing sector is key to the economic development of African countries, and AfCFTA creates a strong foundation for development and investment in the region. The boom in economic activity created by investments in Africa’s manufacturing sectors will make a significant improvement in domestic and intra-African social stability. Manufactured goods tend to be labor intensive, meaning greater investment in manufacturing will create jobs for Africa’s burgeoning youth population. Africa will be home to anywhere from 830 million to 1 billion young people by the year 2050, and current employment trends will not be able to keep up with this growth. Despite the concentration of businesses in SMEs, more than half of the continent’s workforce is currently employed in agriculture, yet manufacturing productivity is six times that of agriculture. By promoting the development of manufacturing sectors across the continent, workers can move into not only more productive employment but will also join a sector which will continue to grow and have increased FDI. Without a significant level of focus on developing a globally competitive manufacturing sector, social issues in Africa today will be exacerbated a rapidly growing population coupled with sluggish economic growth.
On a final note about FDI, it is important for both African leaders and the international community to understand that China’s intentions are not altruistic. Up until the past five years, China was the world’s largest manufacturer of high labor-intensive goods, but it has been offshoring those factories to its southeast Asian neighbors as it transitions to a services-oriented economy. China is already utilizing the energy infrastructure it has developed in Africa, so it would not be a far stretch for China to begin investing in labor-intensive manufacturing in order to profit from the goods produced, which would be a true test not only of the robustness of AfCFTA’s dispute settlement mechanism but of the spirit of the agreement meant to improve the continent’s economic development through regional integration.
Alexandra Calloway-Nation holds an M.A. in International Trade and Economic Diplomacy from the Middlebury Institute of International Studies at Monterey (MIIS) and is the D.C. Chair of the MIIS International Trade Association. She is proficient in Mandarin Chinese and has studied China extensively, her areas of interest are Chinese foreign policy and economic development. She currently works at a major U.S. investment bank.
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