AfCFTA Friday #6: What are the practical benefits of the African Continental Free Trade Agreement?
Demystifying the general statistics associated with AfCFTA
The AfCFTA has almost become a buzzword at this point. Everyone seems to be talking about it and extolling its potential.
The statistics have become familiar:
AfCFTA will lift 100 million Africans out of extreme poverty
The agreement will facilitate $4 trillion of additional investment and consumer spending
AfCFTA will boost contribution to Africa’s GDP by 450 billion US dollars
To the private sector, however, and especially SMEs which make up 98% of Africa’s economy, the questions are unending.
What are the practical benefits of the AfCFTA? As a cashew nut farmer in Tanzania, for example (insert any SME in any country in Africa here), what unique benefits does the agreement give me that I did not have before?
AfCFTA gives SMEs access to a market of 1.3 billion people
Before the African Continental Free Trade Area, businesses in various African countries could only export their goods to a country that had bilateral or regional trade deals with its own country.
A bilateral trade deal is an agreement between two countries to promote trade by lowering barriers such as tariffs. A regional trade deal is the same but at a regional level, for example, EAC, ECOWAS and SADC.
What this meant
Sticking with the example of the cashew nut farmer in Tanzania, they could easily export the nuts to any country within East Africa because of the regional trade deal within the East African Community.
However, if the same farmer found a big market in Togo, but the Togolese and Tanzanian governments hadn’t negotiated a trade deal previously, selling to Togo would be next to impossible.
How AfCFTA changes things
AfCFTA removes the patchwork of regional and bilateral trade deals and creates a unified market. That means the Tanzanian farmer can export to Algeria, the northernmost part of Africa, as easily as they export to Uganda.
Of course, exporting to Algeria will be a bit more expensive because of the distance. Still, there is no difference in terms of everything else, for example, compliance certificates needed for cashew nuts.
That is the benefit AfCFTA gives SMEs—the ability to access 1.3 billion people easily. If initially, you had a customer base of 1 million people, you now have the opportunity to sell to 10 times that.
It will increase your profits, increase revenue for the country, and give you the power to employ more people and build a mega business.
For budding entrepreneurs, AfCFTA unlocks the continent for you. You can go to Ivory Coast, survey the market, notice a gap in the market, and decide to launch an export business in that sector.
AfCFTA will eliminate delays at the borders
Delays at the border are caused by non-tariff barriers. Non-tariff barriers are unnecessary measures that hinder trade, such as the lack of information on obtaining licenses.
Say you are a woodworker in Kenya who manufactures exceptional furniture, and you want to export to Nigeria to increase your customer base.
Suppose you cannot access information on all the licenses that the customs department in both Nigeria and Kenya require. In that case, your furniture will stay at the border until you can acquire all the necessary documents.
That delay will cost you money because the company transporting the goods will bill you for the extra days. Also, the chances of your furniture being damaged are higher because your goods are exposed (accessible to many people) at the border.
AfCFTA will progressively eliminate all non-tariff barriers that cause delays. As a business owner, it will give you the confidence to export your goods to as many African countries as you’d wish.
To showcase how powerful eliminating non-tariff barriers is, consider the example of Zambia and Zimbabwe. The two countries realized inefficient border posts were among the NTBs most affecting the region.
They built the Chirundu One Stop Border Post, which has reduced delays at the border from 5 days to 3 days. With more upgrades, the delay might go down to 24 hours.
The AfCFTA will lower compliance costs
Compliance costs are the costs associated with complying with a tax system. For example, if you are a business owner selling perishable products such as tomatoes, one compliance cost is a health certificate.
Compliance costs across Africa have been extremely high because of the different standards across the various countries. You can find that a product that meets all the standards in Burundi does not meet the standards in Namibia.
The SME owner has to pay more to obtain extra certificates in Namibia. If the business person wants to export to another country, say South Africa, again more costs. Eventually, these costs add up and cut into the profit.
It is even more difficult for SMEs because small businesses do not have much extra money. That is why most export businesses are dominated by big companies—multinationals. They have enough money to cover the compliance costs without affecting their profits. Besides, their profits are massive.
Another thing that adds to the compliance costs is that Africa does not have its own standardization requirements for goods. Africa relies mostly on standards designed in the West.
AfCFTA will create standards unique to Africa and harmonize them across the continent so that if a business pays for a compliance certificate in Kenya, it is valid in all African countries. The business will not be required to pay more.
AfCFTA will implement trade facilitation measures to guarantee ease of trade
OECD defined trade facilitation measures as:
“measures that streamline and simplify the technical and legal procedures for products entering or leaving a country to be traded internationally.”
That means making trade faster, cheaper, secure, and predictable. For example, if a Zambian entrepreneur sends goods to Ghana, the process should be streamlined and predictable enough that they are sure the goods will arrive within x days.
The AfCFTA Secretariat has particularly focused on trade facilitation measures that streamline the physical movement of goods.
Last year, for instance, His Excellency Wamkele Mene, the AfCFTA Secretariat Secretary General, visited Apapa Port in Nigeria and discussed the development of an integrated road corridor that would integrate roads, ports, and one-stop border posts to facilitate smooth transit of goods under AfCFTA.
As an entrepreneur, such trade facilitation measures ensure you can export with as much ease as possible and make maximum profit.
Takeaway
Next time someone asks you to explain how AfCFTA will lift 100 million Africans out of poverty, point them to this article.
AfCFTA creates an environment that facilitates increased intra-African trade. Increased trade among Africans will encourage industrialization because entrepreneurs will start manufacturing goods that other African countries need.
Eventually, the continent will have many industries that employ millions of Africans and by extension lift them out of poverty.
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If you missed the other #AfCFTA Friday issues, please feel free to check them out.
AfCFTA Friday #1: What is the AfCFTA and Why Does It Matter?
AfCFTA Friday #2: What are the opportunities contained in the AfCFTA
AfCFTA Friday #3: How the AfCFTA can contribute to climate change efforts in Africa