Adam Smith in his book, The Wealth of Nations, introduced the concept of the unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically and termed it as the “invisible hand”.
Further, he posited that, “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers….”
Inspired by the above school of thought, David Ricardo put forward the theory of comparative advantage — a country that trades for products it can get at lower cost from another country is better off than if it had made the products at home.
In a bid to build socio-economic integration in Africa, the AU came up with an action plan dubbed Boosting Intra-Africa Trade (BIAT) with its major areas of focus being trade policy, trade facilitation, productive capacity, trade related infrastructure, trade finance, trade information, and factor market integration. The African Continental Free Trade Area (AfCFTA) is one of the vehicles that will be used by the AU in achieving these objectives.
The Executive Council of the AU, which is composed of ministers for foreign affairs, settled on Accra, Ghana to host the AfCFTA Secretariat. This decision was approved by Heads of State and Governments in Niamey, Niger on July 7. The AfCFTA agreement requires members to remove tariffs from 90 per cent of goods, allowing free access to commodities, goods, and services across the continent. It is also during the AU Extra-Ordinary Summit in Niamey, Niger, that the operational governance framework of the agreement was launched, covering Rules of Origin (RoO), the online negotiating forum, the monitoring and elimination of non-tariff barriers, a digital payments system and the African Trade Observatory.
One of the benefits of the AfCFTA is the elimination of tariffs and non-tariff barriers, which will facilitate intra-continental trade, leading to increased regional demand for goods and services. Moreover, it is estimated that Africa’s population will hit 2.5 billion by 2050. This would present an expansive market for goods and services within Africa.
AfCFTA is thus an opportunity for countries in the continent to improve their industrial capacity to accede to the demands of the new-found market.
The AfCFTA could also bolster the proliferation of manufacturing sectors in the continent, an outcome that would resonate with one of the Uhuru’s Big Four Agenda on enhancing the expansion of the manufacturing sector.
According to African Trade Policy Centre, extractive commodities, such as oil and minerals, formed over 75 per cent of the export base outside the continent, while less than 40 per cent of the extractive commodities were exported within the continent between 2012 and 2014.
The market for extractive commodities is characterised by sharp variations in terms of prices and this poses a huge risk to African economies. The plethora of challenges brought about by the volatility of such commodities can be surmounted by using AfCFTA as a lever system which will bring a paradigm shift from exporting extractive products to a more sustainable and inclusive trade.
Moreover, it is noteworthy that the exportation of oil and minerals is a less labour intensive undertaking as compared to exportation of manufactured goods. Therefore, promoting the growth of the manufacturing sector as envisaged in the AfCFTA will create employment opportunities that will enable African businesses to tap into the dividends that come with a youthful population.
On the flip side, all factors held constant, tariff cuts might dent the trade tax revenues at a point in time when nearly all the Tax Authorities in Africa have set very high revenue targets. However, the increased level of trading due to ease of doing business within Africa, will offset the tax revenue dip occasioned by cutting applied tariffs as there would be an exponential upswing in revenues from exports and new businesses.
While the AfCFTA presents a great opportunity for Africa with respect to market access, bargaining power and growth of industries, there are a number of challenges facing its implementation. These include lack of political will in some countries, setting a common criteria to determine the rules of origin (RoO), challenges in its implementation in light of diverse economies and the diversity of economic visions. It is hoped that the AfCFTA will overcome these challenges and herald a new age for intra-Africa trade.
The writer is a Tax Advisor with KPMG Advisory Services Limited. [email protected]