Our editorial Correspondent, Francois Fouche, evaluates the International Monetary Fund (IMF) study that outlines the opportunities accruing from implementing the AfCFTA but also outlines the potential pitfalls…

A pre-pandemic study by the IMF highlighted the potential benefits and challenges of implementing the AfCFTA for African countries. It focused on answering 3 primary questions:

  1. How has intraregional trade in Africa evolved over time and how does it differ from Africa’s international trade? What does the experience of the African subregional economic communities suggest about the continent’s potential to integrate further?
  2. What is the potential impact of the AfCFTA on intraregional trade, and what policies are needed to foster further regional trade integration? and
  3. How will the AfCFTA affect welfare, income distribution, and the fiscal revenue of African countries?

Finding from the analysis in a nutshell

Intraregional trade in Africa has expanded rapidly, and a few regional hubs dominate relatively well diversified trade flows. Intraregional imports, as a share of total imports, almost tripled over the past two decades to 12–14%, or about US$100 billion, as several new subregional economic communities (RECs) boosted trade in the region.

In 2017, three-quarters of African intraregional trade took place within the main subregional communities. In the process, regional trade hubs emerged, such as Côte d’Ivoire, Kenya, Senegal,

and South Africa (see IMF 2015). Unlike exports to the rest of the world, intraregional trade flows are relatively diversified, contain higher value-added goods than exports to the rest of the world, and include a sizable share of manufactured products (for example, motor vehicles and clothing).

Despite this expansion, significant opportunities for further regional trade integration lie ahead. After controlling the lower levels of income and economic size and generally longer distances compared with other regions, African countries’ particular features appear to limit their ability to trade (compared with countries in other regions). Some of these features are structural and would require a long- term commitment to change. Others are the result of policy, such as tariffs, trade regulations, and regulatory requirements, and their removal would boost regional integration.

Opportunities to expand intraregional trade are particularly sizable for some agriculture-related commodities (for example, food products) and manufacturing industries, as well as in some African subregional economic communities that trade significantly less than their peers.

Tariffs and, more important, nontariff bottlenecks are currently limiting intraregional trade integration. The experience of the subregional economic communities suggests that reducing tariffs alone is not sufficient to boost intraregional trade. Poor trade logistics and, to a lesser extent, infrastructure are major obstacles to further trade integration in the region. These bottlenecks are particularly important for landlocked and low-income countries.

Removing trade barriers to foster intraregional trade may unevenly affect countries in the regions. Fiscal revenue losses from lower tariffs are likely to be limited, on average, but they may be significant in a few countries that still apply high export tariffs. Moreover, deeper trade integration can have adverse effects on countries’ income distribution, particularly in countries with more diversified economies and large shares of skilled labour. However, these effects are limited in size as large informality in the economy, while increasing overall inequality, isolates some segments of the population from the short-term effects of trade flows. Moreover, these effects tend to fade away over time.

Finally, small countries, that have more diversified economies and established regional trade hubs, already open to international competition, are likely to benefit more from deeper regional integration than economies dominated by agriculture and natural resources.

What does this mean?

Findings from the same IMF analysis imply that the AfCFTA could significantly boost intraregional trade in Africa if both tariffs and nontariff policy levers are used. Tariff reductions should be comprehensive to have significant effects on intraregional trade flows. Eliminating tariffs on 90% of existing intraregional trade flows – the most ambitious target under the AfCFTA – would increase regional trade by about 16%, or US$16 billion, over time. Tariff reductions should be complemented with policies addressing nontariff bottlenecks.

Even small improvements in addressing such bottlenecks are likely to have sizable effects. Improving trade logistics, such as customs services, and addressing poor infrastructure could be up to 4x more effective in boosting trade than tariff reductions. Moreover, reducing nontariff obstacles to trade would improve the effectiveness of tariff reductions in boosting trade, especially in landlocked and low-income countries.

Therefore, policies to reduce nontariff bottlenecks, particularly poor trade logistics and infrastructure, should be at the centre of the effort to foster deeper trade integration in Africa.

To ensure that the benefits of regional trade integration are shared by all, policies should be put in place to address the adjustment costs that integration may entail. For less-diversified and agriculture-based economies, trade policies should be combined with structural reforms to improve agricultural productivity and strengthen the competitive advantage of these economies. In some countries, measures to mobilise domestic revenues are needed to mitigate the expected revenue losses from tariff reductions (IMF 2018b).

The temporary adverse effects of trade liberalisation on income distribution need to be tempered — particularly in countries with more diversified economies —through targeted social (for example, income support) and training programs to ease worker mobility across firms and industries and promote employment (IMF 2017a).