The African Continental Free Trade Area: Potential Economic Impact and Challenges
The AfCFTA has the potential to increase income and welfare significantly for its member countries. Previous studies have estimated that African countries could reap long-term income gains of up to 5 percent from the reduction in trade barriers in the context of the AfCFTA. Our own work focuses on the estimation of changes in welfare and shows gains of up to 2.1 percent for the continent. However, these could be substantially underestimated given the static nature of the model, which does not include potential effects of the agreement on increased investment, innovation, and knowledge diffusion. The bulk of income and welfare gains would come from increased efficiency derived from reduced non-tariff barriers (NTBs), as intraregional import tariffs are already low. In our work, we also find that the largest proportional welfare gains would tend to go to smaller countries with open economies. These would also benefit from positive terms-of-trade changes. Countries starting with higher trade barriers would tend to gain more.
The AfCFTA would also have a strong impact on intraregional trade—which we estimate would expand by more than 80 percent—but relatively limited adverse effects on trade with nonmember countries (“trade diversion”). Increased intraregional trade would add about US$60 billion to African exports and support ongoing diversification efforts.
Africa is characterized by a plethora of trade regimes. Three broad elements characterize the trade regimes on the continent. First, there are preferential trade agreements between individual African countries and countries outside the continent. These include agreements under the general system of preferences (GSP), granting duty-free treatment for least-developed countries, and preferential access to the US market under the African Growth and Opportunity Act. Second, there are regional trade agreements between African countries and regions outside Africa. This category includes the various economic partnership agreements the European Union has negotiated with various African countries and regional groups on the continent. These also call for the partial and gradual liberalization of African markets to EU imports. Third, there is a web of intra-African trade agreements, including eight REAs and four subregional groups (Figure 1).