An African EU? The opportunities and challenges of a continental trade bloc

This is, we are frequently told, Africa’s century – a time when African economies will finally emerge onto the world stage as a political and economic force. Today, trade with Africa is an attractive opportunity; economies around the world import Africa’s natural resources (oil and gas, metals and minerals) while Africa’s populous nations present attractive opportunities for consumer goods, electronics and telecoms, amongst other products.¹ And yet this economic activity has failed to address a stubborn inequality in living standards between developed and developing economies. In Sub-Saharan Africa, one of the world’s poorest but most resource rich nations, annual GDP per capita growth has not exceeded 4% since 1975, despite exponentially increasing exports.²

Part of the reason behind this lack of growth is insufficient capital. For example, whilst oil, gas and metals account for a large share of African exports, many nations lack capacity to refine these products in bulk, so they sell crude rather than petroleum, and bauxite rather than aluminium. The resulting loss of profit then reduces capacity for African nations to import and trade with their neighbouring countries. Another issue unquestionably stems from poor standards of governance and policy making. In countries such as Angola and the DRC, early profits from extraction industries flowed towards political elites and traders but did not benefit Angolan or Congolese citizens, as they might have done if invested in refineries.³ In Ethiopia, Somalia, Sudan, and elsewhere, disenfranchisement and xenophobia have stoked ethnic tensions, often leading to brutal conflict. Other nations often close their borders in fear of conflict spillover or impose excessive trade barriers.

This has led a number of commentators and development experts to point to the lack of integration between neighbouring states as a key barrier to more accelerated development across the African continent.  While many individual trading nations have established relationships with global partners – whether they be China, France, or the Gulf states – a disproportionately low level of intra-African trade and policy coordination is holding the continent back.⁴ By way of illustration, given that airline routes often reflect the state of political and trading relationships, the quickest way to travel by air from Lagos to Nairobi is via Dubai.

However, all this may be about to change, as African countries have recently realised a desire to co-operate and become more interdependent. The African Continental Free Trade Area (AfCFTA), an agreement which came into effect in May of 2019 with 44 signatories, is now the largest free trade zone in the world by landmass and number of participating nations. Among its members are the largest economies on the continent, Nigeria, South Africa and Egypt and as such the initiative has caught the attention of Western investors. How will such an ambitious, unprecedented agreement work? 

Trading ambitions 
A key objective of AfCFTA is to lower trade barriers. The agreement aims to reduce tariffs – currently 19% on average – by 90% in 2026,⁵ to increase supplier options and reduce the cost of transporting goods. In addition, African companies will be able to sell goods and services in new markets and at lower costs for consumers. For established African businesses, this has the potential to transform their operations – for instance, farmers and retailers will be able to scale their businesses by importing cheaper raw materials and exporting their products across the continent. Despite the drawbacks of low-cost production for small enterprises, it is anticipated that increasing consumption will lead to a net positive effect. This is reflected in AfCFTA’s ambitious aim of growing Africa’s economy to US$29 trillion by 2050 (a ~753% increase).⁶ 

AfCFTA is also designed to bring policymaking stability to a continent with a history of corruption and poor leadership. The agreement will be implemented in two phases: the first including mechanisms for dispute resolution and trade facilitation, and the second ushering in intellectual property rights, competition and investment policy, and equality legislation. These reforms have an important symbolic character as they represent a truly unprecedented show of unity. The prospect of peace and stability in the region, and co-operation over matters of national security, will bolster trade in many deprived economic regions and instil greater confidence for foreign investors.⁷ Evidence suggests that this is already beginning to have an effect, with FDI flows from western firms (particularly those with interests in fintech, construction and shipping) increasing to record highs in 2021.

A bumpy road ahead 
Whilst the AfCFTA presents exciting aspirational goals, the road to implementing this trade agreement will be bumpy. Tariff removal comes with short term losses in revenue, market disruption will put firms out of business and increase structural unemployment, and income inequality could grow as countries respond to new threats and opportunities. In response to these concerns, Nigeria completely closed its land borders shortly after the initial ratification process.  At the same time, competition policy and free labour movement may help to reduce inequality and unemployment,⁸ but also come at a cost. The centre of Africa is unstable, with ethnic conflicts, religious extremists, and impoverished citizens desperate to provide for their families. Measures to combat exploitation and the spread of violence, and to ensure domestic governments reach adequate counter-terrorism programs, are yet to be seen, and this is a cause for concern. 

Finally, a key component of free trade is a developed infrastructure network. African infrastructure is held back by geography; rivers are comparatively short and less easily navigable, and heat, desert, and jungle increase maintenance costs for roads and railways.⁹ This has hampered both trade and development in Africa for decades,¹⁰ with road, rail, air and water transport all needing significant investment. Due to the cost of infrastructure, less economically developed countries are unable to make the necessary changes, so improving interstate travel will be a priority for increasing trade relations. In reality, the capital requirements for these projects are likely to require significant investment from global partners, such as China, France and the US.

A case of construction
Applying AfCFTA to the context of major construction projects highlights the agreement’s opportunities and risks. At present, the Egyptian New Administrative Capital (NAC) is the foremost of these projects, designed to relocate administrative bodies and relieve congestion, overcrowding and pollution in Cairo. Such projects require close collaboration across many industries including construction, infrastructure, utilities, investors and others. In the case of the NAC, most contracts have been awarded to Egyptian and GCC based firms, and materials are sourced both domestically and abroad.

Investment is vital for this kind of project to succeed. However, the NAC is not only raising funds for the development of the city but has also received investment in its healthcare and technology sectors, and to expand major nearby ports. This highlights the long-term value of African construction projects for foreign investors: as centres for trade and points of access to the continent. Because AfCFTA increases intra-African trade, the strategic value of these cities as trading hubs will increase, and construction firms will experience increased investment as a result. In addition, firms operating on these types of projects will experience a transformation in supply chain options, as the cost of acquiring materials from the continent decreases with the lowering of trade barriers. By reducing imports of materials from other continents, and increasing cooperation between African businesses, this will likely increase the number of construction contracts awarded to African companies. In this case, AfCFTA benefits its member states by improving access to raw materials and markets on the continent.

Clearly, AfCFTA will stimulate the construction sector by making the business landscape more accessible. This will create jobs and opportunities, but where AfCFTA creates a more favourable business environment, many small firms could lose out. In the case of the NAC, the firms awarded contracts are global firms which can mobilise large workforces and offer low prices. Left unchecked in a free-trade area, larger firms could monopolise the industry, reducing bargaining power and stifling innovation. If this happens, businesses and investors must be acutely aware of how their partners in the region adhere to international norms and workers’ rights, how they conduct supply chain and employee screening to mitigate security risks, and how they comply with AfCFTA regulations. In turn, these risks demonstrate the need for effective policymaking in combination with implementation strategies to combat the issues that result from free market economies.

Many projects are set to follow the NAC, including the Modderfontein Mega City, Lagos-Calabar Railway, and some of the world’s largest hydroelectric dams in the DRC and Ethiopia. These projects will provide opportunities and develop infrastructure around the continent, and will be heavily influenced by the effects of AfCFTA. Businesses and investors alike should keep a watchful eye over the implementation of the agreement, and which firms are best poised to take advantage of the opportunities it brings.