As Africa’s largest economy, Nigeria’s signing of the African Continental Free Trade Agreement (AfCFTA), would increase the effectiveness of the Continental bloc and likely compel other countries that have yet to sign the agreement to come onboard. This in the main is expected to reduce the proliferation of illicit trade flows in the long term.
Presently, only 23 of the African Union’s 55 member states have ratified the agreement, meaning that the AfCFTA will be implemented unevenly across Africa. This will not only inhibit the overland transport of tariff-free goods, undermining the agreement’s success, but also create tariff disparities between AfCFTA’s implementers in all other states. In turn, this is likely to incentivize smuggling of import goods from low-tariff to high-tariff areas, and that of export goods from high-tariff areas to low-tariff areas.
Therefore, continent-wide AfCFTA membership, bolstered by Nigeria’s joining the AfCFTA, would reduce smuggling in the long term and increase intra-African trade.
Now that Nigeria has signed the agreement. The questions, which people are asking are, what next for Nigeria and what does Nigerians stands to gain from all these.
In March this year, the leaders of 44 African countries endorsed the AfCFTA. Since then more countries have joined in. But just last week, President Muhammed Buhari decided to sign the agreement after several months of consultation with various stakeholders.
In the opinion of some economic experts, the agreement is expected to favour small and medium-sized businesses, usually known by the acronym SMEs, which are responsible for more than 80 percent of Africa’s employment generation and 50 percent of its Gross Domestic Product (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. As history’s largest free trade agreement, with a market size in the region of $3 trillion, most people are excited at the development, although skeptics have pointed to impending challenges, especially those which affect SMEs and which must be addressed if the AfCFTA is to achieve its objectives.
The benefits of AfCFTA
The AfCFTA has potential to allow Nigeria-owned companies enter new markets. This expands their customer base and leads to new products and services, by facilitating investment in innovation.
Manufacturing represents only about 10 percent of total GDP in Africa, on average which is well below the figure in other developing region. A successful continental free trade area could reduce this gap as bigger manufacturing sector will lead SMEs to create more well-paid jobs, especially for young people, thereby alleviating poverty.
Foreign direct investment
With restrictions lifted on foreign investments, investors will flock to the country. 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.
Reduction in input costs
The AfCFTA will ease the process of importing raw materials from other African countries. According the President of Lagos Chamber o Commerce and Industry (LCCI), Mr. Babatunde Ruwase, 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 major potential challenge in harmonizing Africa’s heterogeneous economies under one agreement is the wide variation that exists in their levels of development. For example, over 50 percent of Africa’s cumulative GDP is contributed by Egypt, Nigeria and South Africa, while Africa’s six sovereign island nations collectively contribute just 1 percent.
He says, “The AfCFTA has the greatest levels of income disparity of any continental free trade agreement, and more than double the levels witnessed in blocs such as ASEAN and CARICOM.
Many emerging African markets are traditional economies that rely on farming for employment. These small family farms can’t compete with large agri-businesses in high-income African countries such as South Africa, Kenya, Ethiopia, Egypt and Nigeria. As a result, they may lose their farms, leading to high unemployment, crime and poverty”.
Consumers always prefer cheaper products. This may lead to local producers losing huge sales to foreign suppliers, because the latter can lower the cost of their products by leveraging the reduced tariffs imposed on imported goods. Labourers from poorer countries may be forced to work long hours and to livin shanties without basic amenities such as drinking water and electricity, in order to send money to their families. Some workers might even be forced to accept lower wages and be prevented from joining labour unions, under threat of losing their jobs. Tough competition may lead some companies to disregard the environment when it comes to making products and disposing of waste, just so they can survive in their industry. Many SMEs are likely to cut costs, including those related to manufacturing and the proper dumping of waste.
Many African countries don’t have laws in place that protect patents, inventions and new processes. The laws they do have aren’t always strictly enforced. As a result, companies’ ideas often get stolen. With the AfCFTA, this could get worse, leading SMEs to invest poorly in research and development.
Without comprehensive policy-making and preferential treatment for Africa’s most at-risk economies, the AfCFTA could prove to be a force for economic divergence, rather than a force for good. It is therefore important that participating countries build an efficient and participatory institutional architecture to avoid leaving any economies behind.