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World's largest FTA could increase China's exports to Africa by 50%

(ecf.org.cn)        Updated: 2019-07-18

An extraordinary summit of the African Union (AU) opened in Niamey, the capital of Niger, July 7, with the announcement of the establishment of the African Continental Free Trade Area (AfCFTA), which will create a new channel for foreign investment in the African market. The deal was reached after four years of tough bargaining.

AfCFTA will start operations in July 2020

The summit decided that the free trade area will be headquartered in Ghana, a West African country, and will unite 1.3 billion Africans in building a $3.4-trillion regional economy. The FTA will be the world's largest free trade area, based on population and number of members, since the establishment of the Word Trade Organization in 1995.

Albert Muchanga, AU commissioner for trade and industry, said at the summit that the trade ministers of all member countries agreed on the FTA will start official operations in July 2020.

The AU said that the FTA's major goal is to build a single intercontinental market for the free flow of workers, investment and commodities, so as to promote the industrial development and diverse social and economic development of Africa and to improve the continent's trade, employment and global market status.

So far, 54 of 55 AU members have signed the AfCFTA agreement. Due to geopolitical conflict with Ethiopia, Eritrea has not yet joined the FTA. Once the country is at peace and joins the FTA, the area will cover all African countries and form a huge market covering 1.2 billion people and generating total GDP of $2.5 trillion.

Africa's opportunities and challenges

African countries used to depend on transcontinental export of agricultural products and resources because their industrial products could not compete with those of other countries. The average tariff in African countries is 6.1 percent, and the tariff on exports to countries inside Africa is higher than exports to countries outside Africa. These factors hindered the growth of trade inside African countries. According to the latest World Bank statistics, Africa's intra-regional trade accounted for only 17 percent of its exports in 2017, while that proportion was 59 percent in Asia, and 69 percent in Europe.

Many economists think that the FTA will provide huge opportunities for the development of Africa's intra-regional trade and manufacturing industries. A report released in April by the International Monetary Fund (IMF) said that the FTA will phase out 90 percent tariffs on commodities and the intra-regional trade volume in Africa is expected to increase by about $16 billion, particularly in the fields of mineral products, manufacturing and agricultural industries.

The United Nations Economic Commission for Africa predicted that after the founding of AfCFTA, Africa's intra-regional trade volume for agricultural products will increase by 20 percent to 30 percent. Particularly, sugar, vegetables, fruits, nuts, beverages and dairy products will witness maximum growth.

An international economist at the University of Nairobi, Kenya, believes it is obvious that the FTA will bring opportunities to Africa. First, the large population and high population growth rate in Africa will make the continent a booming market. Second, tariff reductions in African countries in the FTA will greatly improve the fluidity of commodities and services on the continent. Third, trans-boundary infrastructure such as roads, railways, ports and airports is expected to be improved.

"The establishment of the FTA will bring great development opportunities to Africa," said a Kenyan economist who used to work at the World Bank. The economist said that African people are pinning great hopes on the FTA, and expect increases in jobs and improvement of living standards through free trade. The FTA will become a single large market, and current overlapping and contradictory trade rules and tariff will be phased out.

A researcher at the Human Sciences Research Council of South Africa said he thought that the establishment of the FTZ will help more African countries blend into the global value chain. At present, Africa plays a small role in global trade, but with the establishment of the FTA, the competitiveness of African products in the global market is expected to be strengthened.

However, some economists think that the FTA still faces many challenges, including bad road and rail traffic, unstable social and political situations, and heavy bureaucracy and corruption in border management. These factors will hinder the economic growth and integration of African countries. Moreover, there are great differences among African countries in nationality, religion, natural resources and economic development, making it quite difficult to integrate the whole African market.

Additionally, African commodities and services lack competitiveness, and its people's purchasing power for imported goods is relatively low. Also, Africa has no intercontinental payment system, and faces challenges in communications infrastructure.

Some experts think that the current AfCFTA agreement is merely a giant framework and is still far from being an official operating mechanism. The signing of the agreement is the first step in Africa building a comprehensive free trade mechanism. The agreement will be enriched by adding additional protocols.

More convenient for Chinese enterprises to invest and develop businesses in Africa

What opportunities will the FTA bring to Chinese enterprises?

Albert Muchanga said that the establishment of the AfCFTA will be good for the development of Chinese enterprises, indicating broader space for Sino-African economic and trade cooperation. Africa will gradually develop into a large united market, which will provide more space and convenience for Chinese enterprises to enter Africa and will attract more Chinese enterprises to invest and expand businesses in Africa.

Some experts pointed out that external forces, including Chinese enterprises, will take advantage of the FTA to build closer ties with Africa and further contribute to the transformation and upgrading of the African economy. Once the FTA starts operations, it is predicted that China's exports to African countries will increase by about 50 percent.