Date: 8 October 2020

Africa Free Trade – new markets small businesses

Continentsal Free Trade Area (CFTA)

The Continent’s new intra-continental free trade agreement provides significant opportunity for small businesses. Open borders, improved contracts, and better structured value chains are some of the key benefits to small businesses from the African Continental Free Trade Area (“AfCFTA”). 

The AfCFTA commits the majority of the participating countries to 90 percent tariff cuts within a five-year period. The United Nations Economic Commission for Africa (“UNECA”) estimates that the AfCFTA has the potential to boost intra-African trade by 52.3% by eliminating import duties and could double trade if non-tariff barriers (“NTBs”) are also reduced. Micro, small and medium-sized enterprises (“MSMEs”), informal traders, youth and women business operators play a crucial role in African trade but are disproportionately impacted by NTBs due to their limited resources and access to information. Given that MSMEs create an estimated 80% of employment in sub-Saharan Africa, then the economic potential of the trade area is significant.

Furthermore, reducing tariff revenues collected by African countries on intra-African trade will make it more affordable for informal cross-border traders to operate through formal channels. More MSMEs may join the “real” economy, ensuring a fairer distribution of the gains from free trade. There should be greater support for trade facilitation – and information exchange – for MSMEs from the pan-African, regional and local bureaucracies of the AfCFTA. This will be a further incentive for their participation. Reciprocally, the inclusion of more MSMEs in the real economy should increase tax revenues and useful data access for local governments, creating a “win-win” for countries.

More integrated value chains should also help build stronger MSMEs, notably in the areas of access to finance and skills, knowledge and technology transfer. Global value chains make up over 80% of the international production networks of Multinational Enterprises (“MNEs”), meaning they represent a significant engine of the global economy. In contrast with the international reach inferred by their name, most global value chains have a distinctly regional character. Therefore, strategies that better integration local and regional chains into the global economy should have a positive effect on local economies. The AfCFTA helps promote these economic objectives.

The AfCFTA officially came into force in May 2019 for the 24 countries that successfully ratified the Agreement. Currently, there are 30 countries having ratified out of the original 54 signatories. There therefore may be some time yet before a true continent-wide free trade area is in effect. However, there appears clear progress towards success, promising economic benefits for MSMEs across the Continent.

Sources: African Union, Tralac, World Economic Forum

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