AfCFTA Friday #2: What are the opportunities contained in the AfCFTA
An in-depth look at why SMEs in Africa should focus on the African market
Africa is the world’s fastest-growing market. The continent’s economic potential is immense, with data forecasting that business and consumer spending will reach $16.1 trillion by 2050.
Experts agree that the African Continental Free Trade Agreement (AfCFTA) is integral to achieving that potential.
It will increase intra-African trade and create an enabling environment for advanced manufacturing. AfCFTA is expected to boost Africa’s GDP by 7% within 10 years.
With that in mind, what are the opportunities contained in the AfCFTA that you can exploit?
AfCFTA allows you to position your company for future success
AfCFTA implementation is still in its early stages, and much is yet to be done.
However, you get a first-in-the-market advantage if you enter the market now. In a couple of years, when AfCFTA is fully implemented, and the market is thriving, you will reap the benefits revenue-wise.
More than that, as other companies are fighting and jostling to break into the thriving market, you will already be a leader with a loyal customer base.
AfCFTA allows your SME to diversify
Do you have an SME that already exports or plans to export to markets outside the continent? If so, leveraging intra-African trade enabled by AfCFTA to venture into African markets will allow you to diversify.
That way, you minimize risk. For example, if the supply chains outside the continent are destabilized in the future, your company will not go under because you are not wholly reliant on them.
Look at what happened to the EU supply chain when the Ukraine-Russia war began. A lot of businesses that had not diversified struggled.
The agreement facilitates low barriers to entry into the African market
In economics, barriers to entry are factors that make it difficult for a new business to enter a market. Examples include high setup costs and regulatory difficulties.
If the barriers to entry are low, it becomes easier to move into a market and establish a business.
AfCFTA will lower barriers to entry by progressively eliminating non-tariff barriers (NTBs) and over 90% of tariffs. Fewer barriers translate to increased cross-border movement and a low cost of doing business in African countries.
As a result, the goods and services will command competitive prices that will enable SMEs to build multi-businesses that span the entire continent
AfCFTA creates an enabling environment for innovation and efficiency
The agreement contains policies and recommendations that will facilitate trade infrastructure development.
Different regions have already taken these recommendations to heart. For instance, the East Africa Community (EAC) is upgrading its border post infrastructure. In 2018, the EAC launched 18 One-Stop Border Posts (OSBPs) and will upgrade more in the coming years.
OSBPs reduce the time trucks and travelers spend at the border. That translates to goods quickly getting through customs at the border, which saves on costs and increases business profits.
Many regions are also upgrading major road corridors to prevent trucks from breaking down due to bad roads.
Better infrastructure makes it easier for businesses to ship their goods across the continent, creating competition. SMEs will be forced to innovate and exchange technology in the race to be the best and beat the competition.
Increased innovation benefits all parties.
SMEs enjoy increased profits.
Consumers get better goods and services
The economy benefits from the new industries that will arise to meet the tech and innovation demand.
An excellent example to help you understand how a free trade area can spur innovation is space innovation in Europe. The creation of the European Union significantly impacted it.
The agreement will eventually create a better market
As the implementation of AfCFTA proceeds and the continent continues to develop its infrastructure, Africa will ultimately become the more profitable market.
Why?
The reduction of tariff and non-tariff barriers will facilitate ease of access to African markets. The ease of access will reduce delays and allow entrepreneurs to ship their goods to more African countries, increasing profits.
Adopting common market standards and, more importantly, developing standards unique to Africa will make it easier for businesses to sell goods to more African markets.
One won’t have to fill a hundred forms to guarantee that their product meets the standards of another African country. It also means that a business can sell its goods to as many countries as possible, increasing its customer base and revenue.
AfCFTA allows businesses to take advantage of similar tastes and cultures
Africa tends to have similar preferences and tastes for some goods and services.
A good example is the Ankara fabric. It bears different names—Ghanaians call it Kente, while Tanzanians and Kenyans call it Kitenge—but the essence is the same.
If you are in the fashion industry, your business can take advantage of such similarities to export to these markets.
Certain regions in Africa also tend to have similar cultures. That makes it easier to identify unique products to export to these markets.
AfCFTA will allow SMEs to take advantage of their proximity to other African countries
For the past 60 years, historical reasons have prevented most African countries from taking advantage of their proximity to one another to trade more with each other.
Among those reasons is that the infrastructure developed during colonialism favored getting raw materials out of the continent. It did not favor intra-African trade.
Second, after independence, many African countries signed bilateral agreements with former colonial masters. It made it difficult for African countries to form a relationship with each other.
Bilateral agreements also led to high tariff and non-tariff barriers between African countries, which hindered trade.
AfCFTA will progressively lower the tariff and non-tariff barriers. The agreement will also advocate for the development and improvement of the infrastructure linking African countries.
A more interlinked Africa creates an environment for businesses to take advantage of mutual proximity to African countries to export goods at lower transport and logistics costs, increasing profits.
The agreement provides an opportunity for financial and technical assistance
To accelerate adoption and convince SMEs to take advantage of AfCFTA, the relevant bodies are prepared to provide SMEs with opportunities for technical and financial assistance.
For example, the Africa Export-Import Bank (Afrexim) is developing an asset-backed lending program. Africans can use their assets as collateral to access trade financing.
More opportunities such as this will continue to crop up.
AfCFTA facilitates access to cheaper raw materials
Many businesses that need raw materials to manufacture their products often import from China. The distance alone adds a significant amount of cost.
By lowering trade barriers between African countries, businesses will access cheaper raw materials from within the continent.
The agreement will promote value addition
Value addition is arguably the most significant gain the continent will get from AfCFTA. Since independence, the continent has primarily been exporting commodities with a low-profit margin.
AfCFTA will facilitate intra-African trade, which involves diversified and sophisticated value chains. In 2016, manufactured goods totaled 43% of intra-African trade and only 19% of exports outside the continent.
Essentially, when Africa trades with itself, it exchanges sophisticated value-added goods. Mega industries form around these goods, which promotes industrialization.
The continent has been unable to unlock the industrialization potential this far because, since independence, African countries have primarily operated as silos shunning intra-African trade.
If you compare Africa and East Asia, although both regions gained independence around the same time, East Asia has built powerful economies because of robust intra-Asian trade established before and after colonization.
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