South African manufacturers may reap benefits from the new intercontinental free-trade deal.
  • The planned African Continental Free Trade Area will scrap tariffs on imports between African countries.
  • South African exporters could be some of the main beneficiaries of the deal.
  • Cheaper agricultural imports from the continent could be another impact.
  • For more stories, go to Business Insider SA.

A couple of days ago, the African Union officially launched the African Continental Free Trade Area (AfCFTA).

While countries still need to agree on plenty of details, it promises to become the world’s biggest free trade area: 55 countries and more than a billion people will enjoy mostly tariff-free trade between countries.

What is the African free trade deal?

African countries have agreed to scrap import tariffs on 90% of their imports from other African countries within five years.

This will make it cheaper to buy from other African countries, and will encourage trading on the continent.

A couple of the poorest African countries – including Niger and Malawi – will get ten or even fifteen years to reduce their tariffs, to give their producers some protection against cheaper imports.

There are two other possible implications that come with trade barriers going down: an African passport, and a digital African payment system.

One of the ambitions of AfCTA is to make it easier for Africans to travel, work, and live anywhere on the continent. A planned African passport will mean that holders won’t have to get visas when they go to another African country. But while that is one of the AfCTA’s goals, it will have to be ratified by a different agreement – and commentators are dubious whether it will happen in the end.

There will also be a new digital payment platform for African companies who trade with each other. Currently, many businesses are forced to pay each other in dollars or euros because their currencies cannot be exchanged. In the future, they may be able to avoid this by using the platform.

Why is a free-trade area necessary?

African countries don’t trade with each other much.

In fact, while almost two-thirds of African countries’ exports go to Europe, only 17% of exports go to other African countries.

This is very low; in Europe trade within the continent is almost 70%, while in Asia it’s almost 60%.

The far lower African number is due to many problems, including that infrastructure between countries is poor.

Colonial powers each built different kinds of railway network in different countries, and the rails do not necessarily link up. This makes it difficult for countries to move goods between them.

african railways
Railways on the continent. Source: African Development Bank

Poverty has also prevented proper investment in roads. So for example, a country like Bangladesh has 250,000km of roads – compared to 51,000km in Zambia (which is six times bigger than Bangladesh), according to World Bank data. In West Africa, less than a fifth of roads are paved.

Many countries in Africa also produce the same products, often agricultural and other basic commodities, so they don’t necessarily need their neighbours’ exports. If they want machinery or more sophisticated products, they have to import from overseas.

There is a myriad of other problems, including inefficient border posts and bureaucracy.

African countries also levy high tariffs on goods imported from each other. This is the problem that the free-trade area wants to address, and the United Nations estimates that by removing these tariffs, intra-African trade could increase by 52% in less than five years. 

What is the likely impact on South Africa?

South African businesses will be some of the main beneficiaries of the deal, economists expect.

It should create new export markets for our goods: South Africa is one of the few industrialised countries on the continent, and its manufactured products should eventually be exported tariff-free to other African markets.

South Africa's manufacturers could quickly expand outside their usual export markets and into West and North Africa, giving them an advantage over manufacturers from other countries, John Ashbourne, senior emerging markets economist at Capital Economics told Reuters.

Apart from Nigeria and Angola (which supply us with oil), South Africa currently mainly trades with neighbouring countries, with Namibia, Botswana, and Mozambique our main trading partners. And as all those countries are in the Southern African Development Community (SADC), most of the goods traded between South Africa and other SADC member states already enter duty-free.

According to an analysis by the Trade Law Centre (Tralac), Africa accounts for about a quarter of South African exports, and only 12% of our imports. Oil represented half of these imports.

South Africa mainly exports cars, refined petroleum, and coal to other African countries.

The new trade deal should also make goods imported from other African countries cheaper in South Africa – which, given that this is expected to be mainly agricultural products, could pose a challenge for some local producers.

When will the deal take effect?

There’s a lot of political enthusiasm, but the toughest negotiations are still ahead, says Gerhard Erasmus, professor emeritus at the University of Stellenbosch and an associate at Tralac.

Countries still need to agree on which products and services will be tariff-free, as well as the “rules of origin”. This comes down to what portion of the product actually comes from Africa. (Otherwise countries can – for example - import cheap Chinese products and then sell them, after minor value has been added, tariff-free, to other African countries.)

Also, the countries still need to agree on matters such as investment, competition, and intellectual property rights.

There’s a deadline of January next year to agree on which products will be tariff-free (at this stage, this will almost definitely exclude textiles), and the hope is that the zone will be operational from July 2020.

Will it work?

Tariffs barriers between African countries is just one reason why the continent is not getting ahead, says Erasmus.

Problems with transport, border posts, and red tape need to be sorted out before an enabling environment will be created for trade.

“Still, we have to start somewhere,” he adds.

He believes SA businesses should take the gap to increase trade with other African countries, which should also bolster the continental activities of local companies that provide services, like banks.

Importantly, local entrepreneurs should look out for opportunities to include businesses in other countries in their value chains.

“A small landlocked country like Malawi will not see any significant growth if it only produces for itself – it’s only hope is if its businesses start becoming part of larger value chains that supply other markets,” says Erasmus.

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