Meet the World’s Largest Free Trade Area

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Leaders from around the world, including many in Africa, have been sending congratulatory messages to U.S. President-elect Joe Biden and Vice President-elect Kamala Harris.

After four years of a U.S. administration that waged war on multilateral institutions, African hopes are high for a reset.

And it couldn’t come at a better time. As a collective, the continent is embarking on a new economic path.

In 2018, African heads of state signed an agreement that would bring to life the African Continental Free Trade Area (AfCFTA)—a game-changer in African regional and international trade.

When it comes into effect in stages over the next several months and years, the AfCFTA will cover a market of more than 1.2 billion people and up to $3 trillion in combined GDP, with the potential of increasing intra-African trade by over 50 percent, according to the United Nations Economic Commission for Africa.

According to the World Bank, meanwhile, the agreement could add $76 billion in income to the rest of the world.

On its completion, the AfCFTA will become the largest free trade area in the world since the establishment of the World Trade Organization.

Fundamentally, the AfCFTA will put African economies—and African citizens—on a better economic footing. The agreement will enhance competitiveness and stimulate investment, innovation, and economic growth by increasing efficiency and eliminating barriers to trade.

In fact, it will eliminate tariffs on 90 percent of goods and incrementally apply the same to services—this at a time when other regions of the world are rethinking trade agreements and economic integration.

The removal of tariffs on goods in particular is projected to increase the value of intra-African trade by 15 to 25 percent by 2040.

This would translate to between $50 billion and $70 billion in dollar value.

But to give the AfCFTA the best chance of delivering on its promises, the continent will need help and investment for updating its infrastructure. The incoming Biden administration should take note.

The implementation of the AfCFTA, although delayed by the COVID-19 pandemic, is set to begin anew in January 2021, with a focus first on easing trade for small and medium-sized enterprises, which account for 90 percent of jobs created on the continent.

Yet the world the AfCFTA will confront in January will be markedly different from the one in which it was conceived.

There are more challenges than ever, particularly thanks to the economic destruction wrought by the pandemic—“an unprecedented health and economic crisis,” noted the International Monetary Fund, “that threatens to throw the region off its stride, reversing the development progress of recent years and slow the region’s growth prospects in the years to come.”

Beyond the impact of the pandemic, there is also the continent’s existing trade architecture to overcome.

Today’s regional trade arrangements “exhibit narrow patterns of trade, depend on primary products and involve low levels of inter-country trade,” according to William Amponsah, a trade expert quoted by the U.N.

Indeed, intra-African trade is dominated by a handful of countries selling a handful of products.

While this situation is improving, it remains a problem that simply increasing intra-African trade would not solve.
Beyond the impact of the pandemic, there is also the continent’s existing trade architecture to overcome.

In fact, Africa will derive even greater benefits from diversification of trade and moving up the value chain than through a free trade agreement alone.

As it stands, the bulk of African exports are raw materials: agriculture and mineral products with approximately 70 percent of value addition occurring outside the continent.

The limited value-add is in part a result of trade agreements that punish processed products from Africa in favor of raw products.

And those agreements need to be amended for the continent to gain the most benefit from the AfCFTA.

Africa’s underdeveloped infrastructure is another challenge. To move up the value chain, it would need more capacity for processing, packaging, and the like. But the power needed to conduct those operations is often inadequate, expensive, and unreliable.

For example, even though the Democratic Republic of the Congo banned export of concentrates of certain strategic minerals in an effort to encourage domestic refinement and production using those minerals, the country has had little choice but to issue indefinite waivers of the bans because it does not have the smelting capacity to make use of them itself.

Africa also has a labor force issue. Given a growing population and rapid urbanization, the continent’s agro-processing capacity will need an upgrade to make enough food.

Although over 50 percent of the labor force is engaged in agriculture, Africa imports $72 billion in food and agricultural products a year, according to the U.N. Food and Agriculture Organization.

The continent needs more efficiency in agro-processing so that it can be more self-sufficient.

In short, the AfCFTA will be most valuable if Africa is able to diversify its exports and increase the sophistication of its products, and that will only be possible with a functional infrastructure spine—including food, power, and transportation. Financing these large ticket items was a challenge before the pandemic. It will be even more difficult given today’s debt crisis and collapse of revenues.

This is where leadership under the incoming Biden administration can play an important role. A successful AfCFTA will be contingent on a rapid recovery after the pandemic.

As a report from the management firm Palladium notes, “An unprecedented mobilization of global private capital would drive mutually beneficial economic growth that addresses key priorities including job creation, infrastructure development, and improved social services.”

The Biden administration can collaborate with other partners and drive private finance to Africa’s single market.

To be sure, Africa’s challenges make its economic integration project significantly harder than it might be elsewhere. But they do not diminish the economic opportunities on the continent.

African markets still “present investors with attractive opportunities,” the report’s authors write, “for returns in a broad range of sectors, from emerging industries such as financial, education, and health technology, to more traditional sectors including energy and agribusiness.”

That means the United States could increase its economic partnership with the continent to the mutual benefit of both Africans and Americans.

Using existing development tools and co-investing with other bilateral and multilateral agencies, the United States should provide support to Africa’s regional integration project.

In 2018, Washington launched Prosper Africa to coordinate U.S. government resources and expand business opportunities in Africa with a goal of doubling two-way trade between the country and the continent.

It is still unclear how this project, which seems great in principle, will be implemented and how quickly.

Meanwhile, the official U.S. response to the AfCFTA has been ambivalent at best. To the chagrin of African leadership, the United States continues to negotiate a bilateral trade agreement with Kenya in the hope of developing a model that could later be applied to other countries in Africa.

This effort follows a period of decline in two-way trade between the United States and Africa: Between 2014 and 2018, U.S. exports to Africa have decreased by 32 percent, while exports from Africa to the United States have decreased by 55 percent in the same period.

The Biden administration now has an opportunity to strengthen its strategic partnership with Africa by driving investment toward the AfCFTA. The United States already has a suite of policy tools and institutions that make such a role viable.

Among them are Power Africa, Prosper Africa, the Millennium Challenge Corp. (MCC), and the recently launched U.S. International Development Finance Corp. (DFC).

Power Africa has a goal to add more than 30,000 megawatts of cleaner, more efficient electricity generation capacity and 60 million new home and business connections through private-public partnerships.

The DFC, which replaced the Overseas Private Investment Corp., has an expanded mandate and greater resources. The MCC, which provides large grants (in the hundreds of millions of dollars) to promote economic growth, reduce poverty, and strengthen institutions, is embarking on regional projects involving two or more countries.

All of these, which could help Africa address its infrastructure issues, are a step in the right direction.

These ventures, acting in concert with European, Japanese, and Indian partners, could have a significant impact on economic growth in Africa and the expansion of Africa as a market for outside goods and services.

As currently imagined, Prosper Africa will be a one-stop shop to facilitate increased trade and investment between U.S. and African businesses.

The initiative has clear linkages with the AfCFTA, and if implemented fully and embraced, it could generate benefits for both actors.

Both Africa and the United States have an opportunity to increase the quality and scope of their economic exchange, but to do so would require coherent U.S. policy toward the continent. The AfCFTA provides a platform to achieve that.

Gyude Moore is a senior policy fellow at the Center for Global Development.

Bogolo Kenewendo is Managing Director of Kenewendo Advisory and a non-resident fellow at the Center for Global Development.

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