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Chapter 3 - Is the African Continental Free Trade Area a Game Changer for the Continent?

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In 2018, member countries of the African Union took a major step to boost regional trade and economic integration by establishing the African Continental Free Trade Area (AfCFTA). They agreed to eliminate tariffs on most goods, liberalize trade of key services, address nontariff obstacles to intraregional trade, and eventually create a continental single market with free movement of labor and capital. The AfCFTA has been ratified by 22 countries and is likely to take effect in 2019, although negotiations on specific features of the agreement are ongoing. Once operational, the AfCFTA will establish a market of 1.2 billion people with a combined GDP of US$2.5 trillion. This could be an economic game changer for the continent.

Trade integration can help propel development and has prompted spectacular success stories on other continents (see IMF 2018a). Trade integration allows countries to specialize in the production of goods and services for which they have comparative advantage and to exploit economies of scale, thereby improving productivity and growth. Trade integration can also foster structural transformation by spreading knowledge and technology and spurring the development of new products (see IMF 2016). A large free trade area in Africa will amplify the potential for economic transformation in the region. It will not only boost intraregional trade, it will also attract foreign direct investment and facilitate the development of regional supply chains, which have been key engines of economic transformation in other regions.

However, while trade supports growth, it may also entail costs, and its benefits may not be evenly distributed across and within countries. Policymakers are often rightly concerned that further integrating their economies with those of other countries may

benefit some industries and hurt others, negatively affect earnings and employment opportunities in certain sectors and for certain skill levels, and reduce fiscal revenue.

This chapter examines the potential benefits and challenges of implementing the AfCFTA for African countries. It focuses on three questions:

• 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?

• What is the potential impact of the AfCFTA on intraregional trade, and what policies are needed to foster further regional trade integration?

• How will the AfCFTA affect welfare, income distribution, and the fiscal revenue of African countries?