The Benefits of Africa's New Free Trade Area
The creation in June 2015 of a free trade area from Cape Town to Cairo is possibly the most significant event in Africa since the formation of the Organization of African Unity in 1963. It is a grand move to merge existing regional organization into a single African Economic Community.The Tripartite Free Trade Area (TFTA) includes the 26 countries that are members of the Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC), and Southern African Community (SADC). The TFTA covers a population of 632 million and a combined GDP of $1.3 trillion. The area spans 17.3 million square kilometers, which is nearly twice the size of China or the United States.
Critics argue a single trading bloc will not work where individual sub-regional ones have failed. To the contrary, the consolidation of the three trading blocs will build on previous trade gains and will result in the whole being larger than the sum of its parts.
Between 2004 and 2014 trade within the COMESA region grew from US$8 billion to US$22 billion. Over the same period trade within SADC grew from US$20 billion to US$72 billion and for EAC it rose from US$2.6 to 8.6 billion. The overall trade between the three areas rose from US$30.6 billion to US$102.6 billion over the same period.
Despite the growth, only about 12% of Africa's trade is intra-regional. It is 22% for South America, 40% for North America, 50% for Asia and 70% for Western Europe. The tariff liberation of 60–85% will have a significant impact in facilitate the cross-border flow of goods and services.
The TFTA will benefit Africa in at least six mutually reinforcing ways. First, the conclusion of the agreement will generate the impetus for the creation of similar arrangements in western Africa, bringing economic powerhouses such as Nigeria into a continental free trade area. In fact, negotiations for an overarching agreement will be launched in 2015, with the projected creation of an Africa-wide free market in 2017.
Second is a much larger market whose free flow of goods and services will help to maintain economic growth at 6–7% per year. At this rate the combined GDP of Africa is projected to reach $29 trillion by 2050, which would be equal to the current combined GDP of the EU and the US. With additional policies, such growth will contribute significantly to spreading prosperity and reducing povety.
Third, the TFTA will serve as an impetus for investment in Africa's cross-border infrastructure. It is estimated that Africa needs to invest nearly $100 billion annually in infrastructure over the next decade. Less than half of this target is met currently. One of the reasons for the low level of investment has been poor coordination across the different trading blocs. Building infrastructure will also create additional jobs and foster the development of engineering services.
Fourth, the prospects for the larger markets and supporting infrastructure will spur industrial development. This will not only create jobs but it will also have the added advantage of diversifying Africa's economies that are largely dependent on raw materials. The associated technological development will lead to the creation of new industries.
Trade among the three blocs over the last decade has been dominated by intermediate products and manufactured goods, contrary to the common belief that African countries are trading in similar . These trends underscore the potential role of the TFTA as a driver of industrial development and in the manufacture of high-value products.
Fifth, the signal of larger markets will also help to stimulate trade in services. The first beneficiary is likely to be the financial sector, which will be able to lend to larger industrialists seeking to benefit from economies of scale. Such financial services will reinforce the increase in cross-border investments by emerging African firms that are serving as regional champions of industrial development.
Sixth, by being part of larger markets, small African countries will no longer be restricted to producing their traditional products. With better policies and human resources they can become the locus of new manufacturing operations that serve wider markets.
By providing a single economic space with harmonized trade policies and a regulatory framework, the TFTA solves the problem of multiple memberships, rationalizes trade negotiations, reduces the cost of doing business, supports industrialization, and stimulates cross-border infrastructure projects.
There are critical lessons for future negotiations from the process. First is political will. This was demonstrated by the decision of presidents to approve a work program, create a roadmap for negotiations and stick to the timetable. The work was done through technical groups. Trade and Industry ministers met three times over the four-year period to agree on the consolidations, review progress and adopt the outcomes. The presidents met twice to launch negotiations in 2011 and to sign the agreement and launch the TFTA on June 10, 2015.
A second lesson is the importance of a continuous learning process and experimentation. The three trading blocs served as laboratories that generated lessons for technical negotiations. The importance of incremental learning has prompted COMESA to establish a school of regional integration that will start its operations in 2015. The school will serve as a platform for sharing lessons learned through integration.
The TFTA is a key landmark in Africa's economic history. It ranks in significance with the independence of Ghana in 1957, the creation of the Organisation for African Unity in 1963, and its reinvention as the African Union in 2002. To paraphrase Kwame Nkrumah, Ghana’s first president, the best way to learn to be a continental free trade area is to be a continental free trade area.