African nations are trading more with Europe (35 percent) and Asia (31 percent) than with neighbouring markets. In contrast, less than a fifth of African countries’ exports are headed to other countries on the continent. Photo: Xinhua

JOHANNESBURG – The African Continental Free Trade Agreement (AfCFTA) will create the world's largest free trade zone by number of countries and is expected to revolutionise trade across the continent. 

According to new research from Baker McKenzie and Oxford Economics – AfCFTA’s $3 trillion (R44.18trln) Opportunity: Weighing Existing Barriers against Potential Economic Gains – many opportunities for increasing intraregional trade exist in Africa, in goods and services. 

However, the effect of AfCFTA on these two categories will vary. Due to Africa's vast size, as well as the uneven pace of economic and infrastructure development, regional integration for trade in goods will have to overcome many obstacles first. 

In contrast, Africa's trade in services could possibly shape a positive and faster outlook for the continent's trade take-off.

The report shows that although intraregional trade flows in Africa have risen in recent years, from 10 percent of total trade in 2000 to 17 percent in 2018, AfCFTA’s intraregional trade share is below that of the EU, the US, Mexico and Canada (50 percent). 

African nations are trading more with Europe (35 percent) and Asia (31 percent) than with neighbouring markets. In contrast, less than a fifth of African countries’ exports are headed to other countries on the continent.

The report ranks the region's 20 largest economies in terms of the share of exports destined for other economies on the continent.

Uganda and Zimbabwe buck the overall trend, trading more with their neighbours than other African nations do. Yet, their economies pale in contrast to those of Egypt, Nigeria and South Africa, who together represent over half the continent's GDP.

These intracontinental trade shortcomings underscore the extent of lost revenue and development opportunities for African countries. They also highlight the benefits that AfCFTA could bring.

One reason why African nations do not trade more with each other is a misalignment between what various African countries need and what is produced on the continent. For example, over three quarters of African exports to the rest of the world are heavily focused on natural resources, primarily raw materials.

In contrast, a look at African imports from outside the continent reveals that manufacturing products, industrial machinery and transport equipment constitute over 50 percent of Africa's combined needs.

Taking a big picture view, manufacturing gross domestic product (GDP) represents on average only 10 percent of GDP in Africa. This means that Africa is compensating for limited production capabilities through foreign imports. Yet, this manufacturing deficit could be enabled by AfCFTA.

Manufactured products exported to African countries by their peers, primarily industrial machinery and motor vehicles, represent a third of the total trade flow in Africa. But a significant share of these intraregional exports of manufactured goods are re-exports of imported manufactured products from the rest of the world. 

To counteract this, the long-term solution needs to be accelerating industrialisation and establishing strong cross-border supply chains to leverage different countries’ comparative advantages and capture more value-added activities on the continent.

While some of the trade benefits of AfCFTA will be felt quicker than others, and the full effects of the agreement might only be felt from 2030, its launch signals the beginning of an exciting new global trading zone.

Virusha Subban is a partner specialising in Customs and Trade at Baker McKenzie.

BUSINESS REPORT