Nigeria exports rubber and crude oil to South Africa. We earn more if we export more, and this gives us more purchasing power to buy minerals from Ivory Coast and visit the Gambia for holidays.
In turn, Ivory Coast can now buy fertilisers from Morocco and mineral fuels from Nigeria. By trading amongst themselves, these countries get the broadest range of goods and services at the lowest cost.
This is the principle of comparative advantage and trade; rather than trying to do everything themselves, each country focuses on the products with the lowest opportunity costs.
A quick look at the trade profile of developing nations will show their reliance on developed nations in trading relationships. For example, 80% of Mexico’s exports go to the United States, and Nigeria’s trade with other African countries represents less than 10% of our annual trade activities.
Nigeria’s story is replicated around Africa, and that is the problem that ought to be solved by the African Continental Free Trade Agreement (AfCFTA). It seeks to create a Free Trade Area within the continent that would reduce or remove barriers to facilitate the movement of goods and services.
Previously, African countries tried to boost regional trade through international commodity agreements (ICAs). As many African countries mainly trade commodities, the idea was to establish agreements that would help stabilise export prices and commodity supply.
Over time, however, ICAs grew increasingly ineffective as negotiations were driven by political rather than commercial concerns. Developing country exporters came to look at the ICAs as instruments for raising prices rather than for stabilising them.
Hopes are high that the AfCFTA, which would be the world’s largest free trade agreement by population size, will be the first step to boosting pan-African trade. In particular, the AfCFTA would be a way of establishing stronger links between the different regional blocs such as the Economic Community of West African States (ECOWAS) and the East African Community (EAC).
Furthermore, one notable focus area of the AfCFTA is the protection of infant industries. Part VII Article 24 of the AfCFTA says:
“For the purposes of protecting an infant industry having strategic importance at the national level, a State Party may, provided that it has taken reasonable steps to overcome the difficulties related to such infant industry, impose measures for protecting such an industry. Such measures shall be applied on a non-discriminatory basis and for a specified period of time.”
Essentially, the agreement accounts for one common objection African countries make against free trade: many of their industries are young and vulnerable to being priced out by more advanced countries.
Another prominent issue is dumping, a situation where a foreign firm unfairly undercuts local competition by charging prices below the level in its home country. Part V Article 17 says:
“Anti-dumping and Countervailing Measures – subject to the provisions of this Protocol, nothing in this Protocol shall prevent State Parties from applying anti-dumping and countervailing measures.”
So if a country like Nigeria feels other countries are unfairly dumping their products, Nigeria can respond by using anti-dumping duty to level the playing field for domestic producers that face unfair import competition. This will be done in line with provisions on trade remedies and the AfCFTA Guidelines on Implementation of Trade Remedies per relevant World Trade Organization Agreements.
Shall we trade now?
With trade agreements, however, it is essential to read the fine print. This publication has already pointed out that high trade tariffs are not the primary impediment to intra-Africa trade, infrastructure and low mobility of labour and capital are equally significant. In particular, transport costs are an important consideration for trade. The cost of logistics in Africa is still about two to three times what it is in developed countries. If the price of Cocoa in Nigeria plus transportation now approximately equals the price of Cocoa in Congo, trade becomes irrelevant.
Poor quality roads, logistics, and trucks, as well as long queues at border crossings, contribute to higher transport costs in Africa. This corroborates the fact that Africa requires considerable investments in infrastructure to harness the full potential of trade.
Furthermore, it is possible that the AfCFTA will lead to movements of people from one country to another in search of opportunities. This migration of people can lead to some countries having excess labour, but wages and salaries will most likely shift to correct the excesses, just like the forces of demand and supply. In a country where labour is abundant, wages will fall and vice versa. However, there is also a huge possibility that migration will not be significant.
Moreover, the AfCFTA may not help Africa achieve the integration it desires. Although the rhetoric of the agreement has hinted at the ambition to create a single African market, its proposals pale in comparison to the European Union (EU). The EU is able to create a true single market by forcing most of its constituent countries to align monetary policy and stick at least partially to regional fiscal rules. Africa is a long way from this type of initiative, despite recurring suggestions of a single currency akin to the euro.
In reality, international trade tends to bring about more efficient use of an economy’s resources that leads to higher output and income. Over time, increased income tends to result in more saving and, thus, more investment in equipment and manufacturing plants.
This additional investment generally results in a higher rate of economic growth. Moreover, opening an economy to trade can lead to imported investment goods such as machinery that fosters higher productivity and economic growth; gains from international trade grow larger over time.
Although regulatory differences might still create barriers to trade and investment that stifle economic growth, the gains from free trade and regional mobility of labour and capital can change Africa’s fortunes.