Mon, Jul 13, 2015
Intra-regional trade in Africa currently stands at 12%, a figure that is far below levels in Asia, North America and Europe, which currently stand at about 53%, 48% and 70% respectively. .
With an expected 26 signatory nations representing a total of about 600 million people and half of Africa’s GDP, the recently penned Tripartite Free Trade Area (TFTA) is a significant step towards the creation of a much needed continent wide agreement. Signed in Egypt, the proposed deal will combine the Southern African Development Community (SADC), the East African Community (EAC), and the Common Market for Eastern and Southern Africa (COMESA) into a single trade block. This will link the continent from Cape Town to Cairo, albeit without West Africa, and with the conspicuous omission of Nigeria, Africa’s largest economy. While the creation of a free trade area has significant economic benefits, it also inevitably comes with a few drawbacks. What does this landmark agreement really mean for businesses and ordinary citizens?
A free trade area is made up of a group of countries conducting trade with each other without tariffs or other artificial barriers like bureaucracy. The idea is to promote economic integration among member states, leading to increased development and foreign investment. Intra-regional trade in Africa currently stands at 12%, a figure that is far below levels in Asia, North America and Europe, which currently stand at about 53%, 48% and 70% respectively. Analysts estimate that the TFTA could increase intra-regional trade in the continent by up to 20%. The main principle behind free trade agreements rests in the idea of comparative advantage. A free trade area creates competition for market share among businesses and industries from different member states. This is expected to incentivize innovation, increase the quality of goods, and lower prices for consumers Member states are anticipated to increase production in industries in which they have advantages vis-à-vis their competitors in other countries. This will allow economies to focus on strengths, and increases market share for well-placed businesses.
While competition is healthy, it can also be destructive for those that cannot keep up. Trade barriers are designed to protect domestic firms from international competition, especially from those firms that are based in more advanced economies. Once these barriers are knocked down, a few industries in some of the less developed countries will likely collapse in face of this fierce competition. When this happens, people will lose jobs. On the other hand, those industries that survive will thrive and hire more workers. Critics of free trade agreements argue that they only help the more advanced countries involved in the pacts. It is these countries that are likely to have industries with comparative advantages over their counterparts in other countries. Poorer countries might find themselves unable to compete at all, which might kill off their developing industries before they take off.
If implemented successfully, the TFTA will have a positive impact on the continent. However, the benefits will likely not be spread evenly among signatory states. With access to more affordable, higher quality goods, consumers will undoubtedly be the biggest beneficiaries of the TFTA. That said, there still exists many barriers to overcome before these benefits materialize. Good transportation infrastructure on the continent is limited, this could stunt the flow of goods between countries. Additionally, many of the signatory nations’ economies rely heavily on agriculture, this means fewer industries for comparative advantage to come into play in. Nonetheless, the TFTA represents a step in the right direction, after all, nothing can be achieved without trying.
(Image Credit: Business Insider)
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