1. What it is
African Continental Free Trade Area aims to create a single market for goods and services in Africa. It aims to reduce tariffs and also address non-tariff barriers, including overly burdensome customs procedures or excessive paperwork through regulatory measures.
The AFCFTA is a framework agreement covering trade in goods and services including the following protocols: Trade in Goods, Trade in Services, Intellectual Property Rights, Competition Policy, Investment, and Dispute Settlement.
The AFCFTA agreement seeks to gradually reduce, and eventually eliminate, customs duties and non-tariff barriers on goods, as well as to allow free provision of services in priority sectors. In terms of goods trade, the goal is to have 90 percent of products duty-free across the continent.
2. Its objective
The main objective of AFCFTA is to create a single continental market for goods and services with free movement of people and investments, thus expanding intra-African trade across the continent, enhancing competitiveness, and supporting economic transformation in Africa.
3. Its members
54 out of 55 African Union Member States have signed the agreement, the exception being Eritrea which has mostly a closed economy.
It is also ratified by 39 member States including Ethiopia. Ethiopia deposited the instrument of ratification on April 10, 2019, making it the 19th country to do so.
According to the Trade Ministry, the AFCFTA will, among other things, create a stable market for Ethiopian exports, stabilize inflation, increase competitiveness, increase domestic and foreign investments in Ethiopia, modernize trade, formalize informal border trades, strengthen political relations, and create more jobs.
- Economic gains: According to reports, manufacturing accounts for only about 10% of total GDP in Africa on average, and 10.5 percent in Ethiopia. This is significantly lower than the figure in other developing regions. A successful continental free trade zone could help to bridge this gap. A stronger manufacturing sector will encourage SMEs to create more well-paying jobs, particularly for young people, reducing poverty.
- Job creation: AFCFTA will also produce more jobs for Africa’s bulging youth population. This is because extractive exports, on which Africa’s trade is currently based, are less labor-intensive than the manufacturing and agricultural goods that will benefit most from AFCFTA. By promoting more labor-intensive trade, AFCFTA creates more employment.
- Bigger market: The AFCFTA will cover a market of 1.2 billion people and a GDP of $2.5 trillion across all 55 African Union member countries. (https://igad.int/programs/95-icpald/2901-draft-national-afcfta-implementation-strategy-for-ethiopia-reviewed-and-validated-by-stakeholders) AFCFTA will be the world’s largest free trade area in terms of the number of participating countries since the formation of the World Trade Organization. The AFCFTA will allow Ethiopian businesses to enter new markets. This expands their customer base and leads to new products and services, making investing in innovation viable.
- Comparative advantage: Ethiopia has a much better comparative advantage in coffee, oilseeds, leather, textile, and basic metals, among others. Free trade areas like AFCFTA will help Ethiopia specialize more in those products.
- Contraband: According to research on regional integration and informal trade for Benin’s border, it is found that tariff level has a significant positive impact on the probability of observing informal trade. The same is true for non-tariff barriers. (https://doi.org/10.1093/jae/ejy016) Trade integrations have a good chance of combating contraband by tariff and non-tariff adjustments.
- Losing tax revenue: According to the Ministry of Trade and Regional Integration, Ethiopia could lose up to 26 billion birr per year when the African Continental Free Trade Agreement (AFCFTA) is implemented. This includes Surtax, withholding, excise, and VAT tax revenues generated from imports from African countries, which will be tariff-free under the AfCFTA.
- More developed nations dominate the less developed ones: Because of their better developed industrial capacities, Africa’s most advanced countries have an advantage. Allowing them to sell their goods and services to the continent’s less developed countries, such as Ethiopia, may jeopardize industrial development in that country. 5 of the biggest exporting nations in Africa account for 52.9% of total export by value in Africa. South Africa, the biggest exporter in the continent generates around 82.5 billion USD compared to 2.5 billion by Ethiopia which ranks 28th.
6. Which sectors in Ethiopia are primed to take advantage of AfCTA?
Ethiopia is one of the main exporters of coffee in Africa, earning around 796 million U.S. dollars with coffee exports in the year 2020 followed by Uganda with an export value of 515.5 million U.S. dollars as of the same year. Etiopia is also the fifth biggest coffee producer country in the World with total production of 384,000 metric tons as of 2020.
Ethiopia also has positive net exports in the international trade of coffee. And, these cash flows indicate Ethiopia’s strong competitive advantages under coffee.
Ethiopia has a comparative advantage in this industry due to low production and labor costs in the country. Ethiopia is the 4 biggest textile and apparel exporting countries in Africa preceded by Kenya, Lesotho, and Mauritius. Ethiopia also has access to cotton crop, one of the raw materials for cotton as it is found in the African cotton belt.
Ethiopia is the biggest raw leather producing country in Africa. Ethiopia has an advantage in this sector because it has a huge livestock population, large human resources, and low utility costs.
Ethiopia’s hides & skins are highly known for their natural qualities of clarity, flexibility, strength, thickness & compact texture.
Although the performance of this industry has been very low, it still has potential in the African market. This is due to the availability of a cheap labor force, the existence of a high and feasible iron ore potential, macroeconomic stability, the government’s high attention to the sector, and the fast-growing construction industry and infrastructural development.
7. What can Ethiopian associations do in this process of getting their members ready for AFCFTA?
- Research: More research is required to know how AFCFTA will affect different industries in Ethiopia. Each industry should know what prospects this free trade area is offering and what it will cost them.
- Advocacy: More active private sector and associations advocacy is required to ensure direct input into the AFCFTA negotiating institutions and ensure that AFCFTA is shaped to benefit Ethiopia’s business community. Businesses can benefit from the great opportunities that the continent has to offer while also contributing to the continent’s long-term growth and development.
- Awareness creation: Businesses need to be fully sensitised by the government on the potential of AFCFTA. On this basis, they can then establish new trade linkages or push their governments to negotiate for these opportunities if they are not already covered by the negotiated substance of the agreement. Associations should play a role in this by informing their respective industries and empowering their voice to push the government.