Africa united: new trade treaty promises significant economic benefits, but challenges remain
In March of this year, 44 African governments came together to sign Africa’s first, continent-wide free trade agreement in what could prove to be one of the region’s most important economic developments in recent history. The agreement to cut tariffs on 90 per cent of the goods and services traded by the continent’s economies marks a genuine step change and should deliver a significant boost to both inter-African trade and foreign exports.
The hope is that by eradicating trade barriers, countries will be able to collaborate and develop better integrated, regional supply chains, which will provide the platform to export more manufactured, finished goods. This will help reduce the continent’s reliance on commodity exports, such as oil, platinum, copper and iron ore, which currently account for 75 per cent of African trade volumes and restrict economic growth due to their procyclical nature.
According to our forecasts, the new African Continental Free Trade Area (AfCFTA) has the potential to deliver the positive economic impact the cohort of countries is targeting. We expect the value of African exports to grow at a rate of eight per cent per year because of the new agreement, reaching $1.42tn by 2030, compared seven per cent annual growth without it.
This rise will be driven by a change in the balance of African trade. We expect the share of intra-African exports to rise from 19 per cent in 2018 to 27 per cent over the period – approximately the same proportion as the current Association of Southeast Asian Nations (ASEAN intro-regional trade share – with trade volumes between African economies forecast to increase by 11 per cent annually up to 2030, from just seven per cent today.
Manufactured goods will also contribute a higher share as a result of the tariff cuts, jumping to 28 per cent from 24 per cent in 2018. Countries with an established manufacturing base will make the largest gains from the new treaty, alongside food exporters. By 2030, Zambia will reap $20bn in additional exports per year because of the treaty, with Angola ($15bn), Ghana ($14bn), Egypt ($10bn), The Republic Democratic of Congo ($7bn), Kenya ($5bn) and Ethiopia ($4bn) among the countries forecast to see strong increases.
But despite the opportunity, there are a couple of preconditions that must be delivered to realise the trade growth. African economies must commit to continue ramping up investment in major infrastructure, particularly in East Africa which is falling behind the curve. Kenya, for example, would need to invest $117bn in new roads and railways to close its transport infrastructure gap with a similar-sized economy in the ASEAN region.
Increased investment from the private sector will be key to this, but governments must start addressing a common complaint from companies that they are rarely consulted on trade and development policy. Similarly, substantial economic reform will be needed to support the ability to re-exports (transport infrastructure, logistic hubs) and make the continent a more attractive destination investment if it is to increase the annual level of Foreign Direct Investment (FDI), which dropped at $42bn in 2017. In addition, fiscal revenues will also need to be increased to channel more funds into financing new infrastructure projects, which will mean formalising tax systems to increase receipts and strengthen the battle against tax avoidance.
The AfCFTA marks a significant step forward for a continent beset by traditionally strong protectionist tendencies. But to ensure the new deal delivers the trade growth the member countries are seeking, governments must focus on new infrastructure and the reforms that will attract investment.
Stephane Colliac is a Senior Economist for Africa at Euler Hermes, the world’s leading trade credit insurer.
G7 Summit guide: What it is and what leaders hope to achieve
Unless you’ve had your head buried in the sand, you’ll have seen the term ‘G7’ plastered all over the Internet this week. We’re going to give you the skinny on exactly what the G7 is and what its purpose on this planet is ─ and whether it’s a good or a bad collaboration.
Who are the G7?
The Group of Seven, or ‘G7’, may sound like a collective of pirate lords from a certain Disney smash-hit, but in reality, it’s a group of the world’s seven largest “advanced” economies ─ the powerhouses of the world, if you like.
The merry band comprises:
- The United Kingdom
- The United States
Historically, Russia was a member of the then-called ‘G8’ but found itself excluded after their ever-so-slightly illegal takeover of Crimea back in 2014.
Since 1977, the European Union has also been involved in some capacity with the G7 Summit. The Union is not recognised as an official member, but gradually, as with all Europe-linked affairs, the Union has integrated itself into the conversation and is now included in all political discussions on the annual summit agenda.
When was the ‘G’ formed?
Back in 1975, when the world was reeling from its very first oil shock and the subsequent financial fallout that came with it, the heads of state and government from six of the leading industrial countries had a face-to-face meeting at the Chateau de Rambouillet to discuss the global economy, its trajectory, and what they could do to address the economic turmoil that reared its ugly head throughout the 70s.
Why does the G7 exist?
At this very first summit ─ the ‘G6’ summit ─, the leaders adopted a 15-point communiqué, the Declaration of Rambouillet, and agreed to continuously meet once a year moving forward to address the problems of the day, with a rotating Presidency. One year later, Canada was welcomed into the fold, and the ‘G6’ became seven and has remained so ever since ─ Russia’s inclusion and exclusion not counted.
The group, as previously mentioned, was born in the looming shadow of a financial crisis, but its purpose is more significant than just economics. When leaders from the group meet, they discuss and exchange ideas on a broad range of issues, including injustice around the world, geopolitical matters, security, and sustainability.
It’s worth noting that, while the G7 may be made up of mighty nations, the bloc is an informal one. So, although it is considered an important annual event, declarations made during the summit are not legally binding. That said, they are still very influential and worth taking note of because it indicates the ambitions and outlines the initiatives of these particularly prominent leading nations.
Where is the 2021 G7 summit?
This year, the summit will be held in the United Kingdom deep in the southwest of England, with Prime Minister Boris Johnson hosting his contemporaries in the quaint Cornish resort of Carbis Bay near St Ives in Cornwall.
What will be discussed this year?
After almost two years of remote communication, this will be the first in-person G7 summit since the novel Coronavirus first took hold of the globe, and Britain wants “leaders to seize the opportunity to build back better from coronavirus, uniting to make the future fairer, greener, and more prosperous.”
The three-day summit, running from Friday to Sunday, will see the seven leaders discussing a whole host of shared challenges, ranging from the pandemic and vaccine development and distribution to the ongoing global fight against climate change through the implementation of sustainable norms and values.
According to the UK government, the attendees will also be taking a look at “ensuring that people everywhere can benefit from open trade, technological change, and scientific discovery.”