African Continental Free Trade Area: what is it, and how does it affect your business?
- Last updated: October 16, 2024
Your company is going to expand to Africa soon.
Understandably, you were pulled in by the potential for market growth, the abundant natural resources, and human capital…but further research has you in doubt about the trade infrastructures in place. Will they be able to support your growth? Are there too many administrative and political barriers to success?
In the past few years, the AfCFTA (African Continental Free Trade Area) has emerged as a reply to questions surrounding Africa’s ability to grow and foster trade.
According to the UN, some experts say that the AfCFTA will improve cooperation, promote exports and investments, increase capital and workforce mobility, and promote industrial development, among other things.
But what is the AfCFTA really, and what can it do for your business?
What is the AfCFTA?
The AfCFTA is one of the main initiatives of Agenda 2063: The Africa We Want. It is the largest free trade area worldwide.
The main goal of the AfCFTA is to unite the continent’s roughly 1.3 billion inhabitants and their about US$ 3.4 trillion combined GDP into one common market. It is an enormous step taken towards Africa’s route to self-sufficiency.
The AfCFTA also expects that its presence will create an income boost of 7% for Africa by the year 2035. Additionally, UNCTAD estimates that if all tariffs are removed, GDP could grow by 1 to 3% for every member country of the AfCFTA.
As a reminder, a free trade area is a defined geographical space where goods and services are free from tariffs and quotas. This means that the trade of goods is not restricted in numbers, and that no taxes are imposed on goods to increase government revenue, or for any other reason.
Naturally, this can facilitate imports and exports, boosting commerce and intra-trade activity within the African continent.
But not all free trade zones are equally free.
Participating countries must first establish regulations for the free trade area’s operations for it to grow. The member states must agree on answers for the following questions and more for the free trade area to work:
- Which tariffs—if applicable—will be permitted, and how much will they be?
- Which customs protocols will each nation have to adhere to?
- How will the nations taking part handle disagreements over trade?
- How are rights to intellectual property going to be managed and safeguarded?
Typically, the answer and ensuing consensus to these issues depends on the political sway within the group and power dynamics between nations.
This determines the extent and level of true “freedom” in the transaction. The objective is not to have all countries fall into agreement, but rather to develop a trading strategy that all members of the free trade area can reasonably support.
How will the AfCFTA work?
Member nations of the AfCFTA would start to purchase from one another rather than importing overseas as is mostly the case now. This would be done by offering each other trade privileges.
This type of trade has already begun within the AfCFTA. In October of 2022, Cameroon, Egypt, Ghana, Kenya, Mauritius, Rwanda, Tanzania and Tunisia all participated in the AfCFTA’s Guided Trade Initiative (GTI).
By accomplishing this, the AfCFTA’s trade would increase and provide stable grounds for the growth of local supply chains and the deepening of Africa’s manufacturing capabilities.
Commerce and industrialisation go hand in hand since promoting regional integration will probably increase value addition both domestically and regionally.
Through promoting commerce among African nations, the AfCFTA would lessen Africa’s reliance on commodities imported from outside of Africa. Consequently, this would boost local supply chains, and create the jobs required to capitalise on the continent’s growing population.
Which countries are part of the AfCFTA?
The AfCFTA first started with 24 members. Since then, the free trade area has grown to include 54 countries, as of September 2023.
Ghana, Botswana, Kenya, Rwanda, Niger, Chad, Guinea, Côte d’Ivoire, Mali, Namibia, South Africa, Congo, Republic of Djibouti, Mauritania, Uganda, Mozambique, Senegal, Togo, Egypt, Ethiopia, Gambia, Sahrawi Arab Democratic Rep., Sierra Leone, Zimbabwe, Comoros, Burkina Faso, São Tomé & Príncipe, Equatorial Guinea, Gabon, Mauritius, Morocco, Central African Rep., Angola, Lesotho, Tunisia, Cameroon, Nigeria, Malawi, Zambia, Algeria, Burundi, Seychelles, Tanzania, Cabo Verde, Democratic Republic of the Congo, Guinea-Bissau, and Eswatini.
How can the AfCFTA affect your business?
The AfCFTA, like other free trade areas, can allow for major specialisation to happen within a country, and later enable an advantageous flow of commerce for these particular goods. This is because of the lack of quotas and tariffs, which encourages production and specialisation in manufacturing.
However, to qualify for preferential, quota and tariff-free rates, your business must meet rules of origins requirements.
What does this mean?
Rules of Origins specify the requirements that businesses must meet to verify that their products are produced within the Free Trade Area and are therefore qualified for preferential treatment there.
This also means that your company will need to be and to remain 100% compliant with all the legislations in place. An EOR or PEO partner would serve your business well in these instances, helping you to stay away from legal troubles such as fines and long trials.
Reservations about the AfCFTA
Critics of free trade areas often give out warnings about these blocs’ abilities to allow for super-specialisation. This can often mean that some countries grow in a disproportionate manner especially in a certain sector, which can then negatively affect production in other countries. Critics also warn about the dangers of over-specialisation, arguing that countries could become overly dependent on a few key sectors.
Ready to navigate this new landscape of opportunity?
…but unsure of where to start? Which regulations you need to be aware of? And which pitfalls to avoid?
Africa HR Solutions will help you stay compliant and take care of all your HR needs through our PEO and EOR offers. Find out more about how we can help your business here.