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by Grit Campos Nave | published on 22 January 2021 | reading time approx. 6 minutes
On January 1, 2021, the so-called Pan-African Free Trade Area, the “African Continental Free Trade Area” (AfCFTA) came into force. One of its main objectives is to promote as well as strengthen trade in goods and services on the African continent.
With its gradual implementation into one of the world's largest free trade areas, the economy within Africa is expected to grow even stronger and be united as a whole beyond the already existing trade blocs. This results in the opportunity for African countries, but also for German companies, to generate considerable growth. The German Federal Ministry for Economic Cooperation and Development has already been supporting the establishment of an African free trade area since 2016 through the “Gesellschaft für Internationale Zusammenarbeit”.
The agreement is a project of the African Union (AU) to establish a common large single market. It has been signed by 54 AU member states, 34 of which have now ratified the contract. This is a historic milestone for a common market on the world's second largest continent.
At the same time, the free trade area represents an enormous challenge for all participating countries in Africa, with the necessary tasks still to be accomplished in stages.
The African continent is one of the most rapidly growing economies in the world. Nevertheless, total continental intra-African trade is only about 17 percent. By comparison, the vast majority of its economic trade is with countries outside the African continent. The reasons for this are numerous, such as intra-African trade barriers, customs duties, and inadequate infrastructure, which make the trouble-free transport of goods difficult or even impossible.
At the same time, the vast majority of Africa's exports consist of raw materials, such as oil and gas and minerals, to other regions outside the continent. These raw materials are also subject to very high price fluctuations. In addition, economically weak African countries (with the exception of South Africa and Nigeria, for example) depend to a considerable extent on their income from raw material and agricultural exports, and there is no raw material processing sector (industry). Industrial processing, e.g. of cocoa, takes place mainly in South Africa and Nigeria or even outside the African continent. This shows that many African countries are still very dependent on imports, including food products, but also have a very high import requirement for machinery (capital goods) and other goods needed by the rapidly growing population. These goods are imported from South Africa or countries outside Africa, such as the Republic of China, the United States and Europe, among others.
The members of the AU have already recognized the importance of diversifying their economies and promoting other sectors so as not to become unilaterally dependent on revenues from their commodity exports. Their goal is to no longer be dependent on the pure import of finished goods.
The new free trade area with a total of 1.2 billion people and 54 states on the African continent promises many economic potentials for the African countries, but also for German companies. It is a single market in which products are to be manufactured, bought and sold between African countries and customs duties are to be largely abolished to enable the free movement of goods and services.
The main objectives of the AfCFTA are in particular::
Finally, the supply chain on the African market should increase significantly in the future.
With the free trade area, Africa's overall position on the global stage could be significantly strengthened by making better use of the economic potential of the participating countries. According to estimates by the World Bank, exports on this continent could increase considerably by around 2035, the gross domestic product could rise significantly and many new jobs could be created.
For Africa's economy, this offers the chance to become less dependent on the rest of the world. For example, one of Africa's largest deep-sea ports is currently being built in Kenya, which is expected to develop into a gateway to the Asian market in the future and also establish itself as one of the most important transhipment points for goods.
This is an example of how Africa is still described by the media in a very one-sided way as a developing country, which does not always correspond to the facts. For example, Nigeria, a market of around 196 million people, has numerous industries with production facilities. Besides Nigeria, South Africa also has the largest economy on the continent and at the same time serves as a hub for German investments in the growing sub-Saharan African markets. Due to its modern infrastructure, numerous production facilities (including automobiles, food, chemicals) in the economic centers of Johannesburg and Cape Town with their services (renewable energies, finance, insurance, trade, IT), the country at the Cape offers a wide industrial base as well as a highly developed financial sector and functioning legal system with great potential for German companies.
It will certainly take some time before the advantages from the AfCFTA are realized. The modalities required for this would also have to be implemented in advance in the individual African states. There are already regional trade alliances on the African continent, such as the “East African Community” (EAC) for East Africa or the “Economic Community of West African States” (ECOWAS) for West Africa. However, there is hardly any economic exchange between East and West Africa. Many African countries are mainly oriented toward Asia, especially China. This shows that the existing economic areas are far from sufficient to exploit the existing potentials throughout the continent. Further, many trade barriers still prevent intra-African trade to a considerable extent. An entrepreneur or exporter has to face many trade barriers, such as inadequate road infrastructure due to missing or broken transport routes for goods transports as well as high import duties with disruptive export regulations. Bureaucratic procedures with sometimes extremely long waiting times at many border crossings, which make trade within Africa difficult and also increase trade costs, are not uncommon. With the elimination of time-consuming export regulations, but also the construction of an adequate road infrastructure connecting African countries, African as well as foreign companies, for example, could more easily transport and export their products from their company location, e.g. from South Africa, to neighboring African countries. Another possibility would be the implementation of a strong domestic and Africa-wide customs administration. As part of the implementation of the free trade zone, the necessary parameters for trade, investment and employment in Africa should be created in stages.
The increasing demand for goods and services, mainly due to the rapidly growing population, means the creation of further investment opportunities. There is a need for development in many sectors, including agribusiness, education and health. The high demand for goods and services, especially in the infrastructure, food, energy and water sectors, also offers German companies an opportunity to do business in Africa. It would be conceivable to establish a location in modern and economically highly developed South Africa (hub) in order to supply not only the surrounding sub-Saharan African markets. The establishment of production facilities, e.g. in the food sector and the automotive industry, could also create supplier and customer industries for the whole African region. This could motivate German investors to set up more production sites so that they can ultimately sell more of their German products on the African continent. For example, German mechanical engineering companies could supply new factories. The purchase of equipment components for vehicle production is also conceivable, such as the purchase of vehicle seat covers from Ethiopia. Consequently, investments and trade could also become more attractive for German investors through a pan-African market for African companies. However, it is conceivable that existing customs regulations between the individual African states and the European Union will initially remain in place despite the AfCFTA. When and to what extent a uniform African external tariff will be implemented in the future remains to be seen and depends on the concrete will of the individual African states to implement it.
The current Corona situation highlights how important it can be to move together economically and how difficult it can be to access processes when country borders are suddenly closed and domestic and foreign air traffic is significantly restricted or even stopped. With the establishment of the Pan-African Free Trade Area, the stage is set to boost trade on the African continent, reduce existing barriers, reform and unify national trade laws. This means enormous challenges for the countries. It can be assumed that the effects will initially vary from country to country. Against the background of the problems still to be overcome, it remains to be seen to what extent the economy on the African continent will succeed in developing more dynamically than before. Negotiations on concrete further steps between the individual economic ministers take place continuously.
In order to become more competitive worldwide in the future and to integrate into world trade in the long term, the time is right for the African continent to reposition itself and become more competitive with the launch of the free trade zone.
Nicola Lohrey
Managing Partner
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