On Continental Free Trade Agreement

Thursday, February 07, 2019

In March this year, the leaders of 44 African countries endorsed the African Continental Free Trade Agreement (AfCFTA). Since then more countries, including South Africa, have joined in.

Th agreement is expected to favour small and medium-size businesses, usually known by the acronym SMEs, which are responsible for more than 80% of Africa’s employment and 50% of its GDP.

Obviously, any economic policy that facilitates imports and exports among member countries - with lower or no tariffs, free access to the market and market information, and the elimination of trade barriers - offers numerous benefits to SMEs. And as history’s largest free trade agreement, which has a market size in the region of $3 trillion, most people are excited at the development. But skeptics have pointed to impending challenges, especially those which affect SMEs. These must be addressed if the AfCFTA is to achieve its objectives. But first, let’s look at who stands to gain.

The AfCFTA will allow African-owned companies to enter new markets. This expands their customer base and leads to new products and services, making investing in innovation viable.

Manufacturing represents only about 10% of total GDP in Africa, on average. This is well below the figure in other developing regions. A successful continental free trade area could reduce this gap. A bigger manufacturing sector will lead SMEs to create more well-paid jobs, especially for young people, thereby alleviating poverty.

With restrictions lifted on foreign investments, investors will flock to the continent. This adds capital to expand local industries and boost domestic businesses. New capital enhances an upward productivity cycle that stimulates the entire economy. An inflow of foreign capital can also stimulate banking systems, leading to more investment and consumer lending.

The AfCFTA will ease the process of importing raw materials from other African countries. It will also enable SMEs to set up assembly firms in other African countries, in order to access cheaper means of production and thereby increase their bottom lines.

Global companies have more expertise than domestic companies to develop local resources. That’s especially true for businesses in the manufacturing sector. The AfCFTA will allow multinationals to partner with local firms to develop raw materials, training them in best practices and transferring technology in the process.

A Guest Editorial