With the combined resources inherent in different African countries, as well as a population of more than one billion people and a combined gross domestic product (GDP) of over $3.4 trillion, intra-African trade has the potential to eradicate poverty from Africa whilst it provides solutions to many of the challenges the continent faces as a whole.
Country A: One hour of labour can produce either three kilograms of steel or two shirts. Country B: One hour of labour can produce either one kilogram of steel or one shirt.
Country A is more efficient in both products. Now suppose Country B offers to sell Country A two shirts in exchange for 2.5 kilograms of steel.
To produce these additional two shirts, Country B diverts two hours of work from producing (two kilograms) steel. Country A diverts one hour of work from producing (two) shirts. It uses that hour of work to instead produce three additional kilograms of steel.
Overall, the same number of shirts is produced: Country A produces two fewer shirts, but Country B produces two additional shirts. However, more steel is now produced than before: Country A produces three additional kilograms of steel, while Country B reduces its steel output by two kilograms. The extra kilogram of steel is a measure of the gains from trade.
Source: International Monetary Fund (IMF)
Nevertheless, intra-African trade stands at about 15% in comparison to intra-Asian trade at 58% and intra-Europe trade at 67%, North America at 46%, and Latin and the Caribbean at 20%. Essentially, over 80% of the exports from African countries go to other continents apart from Africa while only three (3) countries – South Africa, Nigeria, and Namibia drive intra-African trade at 23.3%, 8.5%, and 8.1% respectively. (African Trade Report 2017).
One of the thoughts most economists have a consensus on is that trading between countries is more advantageous to the countries involved in the long run. However, international trade has over the years presumably witnessed more contention in political issues both on the home front and between governments.
A key factor influencing international trade is that buying of goods or services abroad serves to improve living standards as goods produced in one country may be produced at cheaper rates in another country compared to the cost of producing them at home. Also, international trade may serve a better purpose by enabling the exporting country earn foreign exchange when able to make more sales than it would have by selling in its own markets.
Historical economists like Adam Smith and David Ricardo have established different economic basis for free trade. Ricardo’s observation was that trade between countries was driven more by comparative costs in relation to absolute costs. His argument was that there may be instances where one country may be more productive than another country in the sense that it is able to produce more goods using fewer inputs like capital and labour. It would therefore be more beneficial for such a country to export products in which it has the greatest absolute advantage and import products which it doesn’t have absolute advantage in producing.
Economic benefits of Free trade
Recently, the Federal Government of Nigeria through the Special Adviser to the President on Economic Matters, Dr. Adeyemi Dipeolu stated that Nigeria was not in a hurry to sign the African Free Trade Agreement (AfCFTA), asserting that the decision was based on the President’s “commitment to ensure that only what will benefit [the country’s] economic interest is implemented as a policy.”
Nevertheless, according to the International Monetary Fund (IMF), research has shown that with the opening up of trade channels among countries some of the benefits may include:
- It allows for beneficial adjustments not only across industries but also within them as well: By this it means that with pressure to meet up with international competition, local firms are under more duress to make profits and in some instances, it encourages less efficient firms to outsource some of their production processes and make room for more efficiency in the industry.
- It allows for greater product variety: An example can be seen in the United States where the country imports four times as many variety of products (like cars) than it did in the 1970s. Consequently, the number of countries supplying these products have doubled to accommodate the demands of the market.
From the foregoing, one may then wonder why more free trade policies and international trade opportunities have not been taken advantage of in Africa.
What does the African Continental Free Trade Area (AFCTFA) mean for Africa?
At the 18th ordinary session of the Assembly of Heads of States and Governments of the African Union which held in Addis Ababa, Ethiopia in January 2012, the decision was made to establish an African Continental Free Trade Area (AFCFTA) by 2018 which would include all 54 African countries. Among some of the benefits of the agreement, the AfCFTA is supposed to enhance Intra-African trade through trade liberalisation. This elimination of domestic barriers to trade is meant to supposedly lead to a larger market where competitiveness and improved standards are encouraged, a boost in trade between countries, cause a more vibrant space for economic growth in Africa, encourage economic diversification, promote structural transformation and technological development and ultimately improve human capital.
The pros definitely outweigh the cons. According to the United Nations Economic Commission for Africa (UNECA), it is estimated that AfCFTA has the potential to increase intra-Africa trade by 52% generating about $35 billion for Africa by the year 2022. UNECA also claims that imports would reduce from outside the continent; thereby decreasing the cost to the continent by $10 billion and increasing agricultural and industrial exports by 7% and 5% respectively with an average yield of $4 billion and $21 billion respectively.
From the foregoing, it begs the question, why is Nigeria hesitant to sign-off on the free trade agreement?
The Federal Government in agreement with the Manufacturing Association of Nigeria (MAN) both believe that Nigeria would be the target of the AfCFTA as the country has the population that can purchase the traded products. The government also sees a situation where the country becomes a “dumping ground” and this will stifle the growth experienced in the agricultural sector of the economy. The government further states that its concerns are genuine as local manufacturers might not be able to compete favourably with their African counterparts given the current challenges with power and infrastructure.
Unarguably, the fears of the government and relevant agencies are valid. Nevertheless, if the ultimate success of the AfCFTA lies in the commitment by individual countries to implement the agreement, Nigeria’s current stance in not signing the agreement seemingly goes against its position as a harbinger of progress on the continent.
Therefore, rather than dwell on the attendant dangers of signing the agreement, the responsibility of every sector of the economy lies in synchronising efforts at surmounting the challenges in no time. The government needs to consider the AfCFTA an opportunity to fast- track the creation of the long-due enabling environment for local manufacturers to improve production to meet local demands with competitive prices that can match their African counterparts and export to target countries that require such products.
Private sector actors on the other hand have a major role to play in using the huge benefits of intra-trading system to their advantage by preparing ahead and also devising creative means to beat current challenges to production and intra-African trade. In so doing, Nigeria herself would be the leader in the movement for trade liberalisation in Africa.
Editor’s Note: This is the first part of a 2-week series on the African Continental Free Trade Area (AFCTFA) agreement. In next week’s edition, we will consider how different sectors of the economy can surmount the dangers of signing the agreement and how they can plug into the opportunities inherent whilst examining how other developing countries have been able to leverage on trade liberalisation despite inherent dangers.
*References are available on: www.sustainableconvos.com next edition