Direction of African trade flows expected to significantly change with AfCFTA, new research paper notes

A paper from the Research Centre for International Economics (FIW) of the Austrian Institute of Economic Research analyses trade flows between Africa and other third countries and territories, examining the dynamics that will characterize such flows following the implementation of the African Continental Free Trade Area.

The FIW paper preliminarily notes that despite African trade had a positive post-pandemic rebound in 2022, growing to $689 billion from $589 billion in 2021, the Africa’s share of world trade remained under 3% over the last decade. This trade is overshadowed by the shares of other regions, such as Asia, which contributes to global trade for as much as 40% (only China for 13%), and Europe for 37%. Because of these characteristics, Africa is generally seen by other economies more like an attractive consumer market than a production area, also considering that 25 per cent of global population is concentrated in its territory, with an estimated value worthing $1.4 trillion in 2015, and a projected grow to $2.5 trillion by 2030.

Historically, the composition of African trade has been characterized by trade of primary commodities with little value added. Although there has been some diversification in the destination of trade, increasingly with Asia and also with the continent itself, trade with Africa’s traditional partner Europe is still very dominant. On average, during the last 5 years, the EU was the Africa’s first trade destination, representing more than a quarter of the continent’s trade with the world (28.6% of its exports and 26.9% of its import shares, respectively). The second place in terms of Africa’s trade destinations, is shared between the continent itself and China. Intra-African exports represented 15.5% of Africa’s global trade share, closely followed by China (14.9%). Important are also exports to India (6.8%). Conversely, African imports from China represented 17.8% of its global total, compared to 14%, 9.1% and 5% from Africa, the Americas and India, respectively. Trade with the rest of the world on average comprised almost a third of total African exports at 31.6%, and just over a fourth of total African imports at 26% for 2016-2022.

African exports to the EU are primarily made up by extractive commodities, especially fuels (46%). These are followed by manufactured goods (28%) and food (14%), where there is generally little value addition from the continent. In comparison, when considering African imports from the EU, over two thirds are manufactured goods (67%), while exports of processed food and fuels, represent only 13%. In contrast, intra-African trade is characterized by an higher level ofsophistication, with manufactured goods representing about 45% of this trade, followed at a long distance by fuel (21%) and food items (20%).

With the AfCFTA, the FIW paper notes, these trade patterns are expected to change, because according to the Vinerian theory, the adhesion to a Free Trade Agreement (FTA) determines a trade creation effect. This means that following the adhesion to this kind of agreements, trade exchanges between members of the FTA normally increase, due to the fact that reciprocal imports become less costly compared to imports from third countries, because of the abolishment of customs duties and other equivalent taxes between FTA members, as well as of non-tariff barriers. As a consequence, part of import flows that previously originated from outside the FTA are typically redirected to inside this area, which is called ‘trade diversion’ effect.

But the AfCFTA is more than a standard Free Trade Agreement. It includes provisions that go well beyond trade in goods, like on trade in services (with negotiations currently focused on the liberalization of 5 priority sectors, namely business, communication, financial, tourism and transport services, and others that will follow, such as health, education and recreational services, for instance). Moreover, additional protocols provide common rules on intellectual property, investment and competition, while other two - not yet adopted - include harmonized provisions on women and youth, and on digital trade, respectively. Because of these characteristics the AfCFTA is generally defined as a ‘deep agreement’, opposed to ‘shallow agreements’ which, instead, are focused exclusively on elimination or reduction of tariffs.

The AfCFTA is also an important vehicle to promote intra-African trade and investment, especially in particularly dynamic sectors such a transports. For example, the expected growth in intra-Africatrade will lead to an increase in the demand of trucks, rolling stock, aircrafts and ships, so opening opportunities for (both domestic and foreign) companies already operating on the continent, or for those thinking to establish a production base for the manufacture of these means of transport to source the African market.

Though the AfCFTA is still at its early stages, notes the paper, there are some important challenges and concerns that need to be urgently addressed in order for this agreement to be successful. Among these, a major question is how this agreement is going to coexist with other agreements and obligations which are already in place or being negotiated with other regions, such as the EU (namely, the Economic Partnership Agreements-EPAs) and China, which further fragment and complicate the web of preferential regimes already existing on the African continent. The paper suggests to revise all these agreements in order to align them with the AfCFTA framework. However (we note), since the AfCFTA framework is not yet complete, it would be appropriate for African states to suspend ongoing negotiations with third countries or trade blocs until the AfCFTA negotiations are completely closed. This would avoid the approval of agreements that will have to be revised at a later stage, resulting in duplication of efforts and resources.

In conclusion, after noting that the AfCFTA brings unprecedented opportunities for Africa’s transformation, competitiveness, and development, the paper notes that the true success of the agreement will be measured through monitoring and supporting its implementation process: phases where African nations are burdened by historical inefficiencies, as we explained in this other post.