Africa’s New Continent-Wide Free Trade Agreement Is Ambitious—and Potentially a Global Pacesetter

The continent’s turn toward open trade has great promise, especially when much of the world’s advanced countries are in retreat, BRG’s Harry G. Broadman says

Earlier this year, 54 African nations signed on to the African Continental Free Trade Agreement (AfCFTA)—an unprecedented move to unify the continent, increase intra-African trade flows and potentially generate a gain in economic welfare of between 2 percent and 4 percent. AfCFTA is an ambitious plan for a continent that’s home to some of the world’s worst poverty and scars from centuries of colonialism. Additionally, it’s a move toward free trade at a time when protectionism scores victories in other parts of the world, especially, of all places, the advanced countries.

Harry Broadman, chair of BRG’s Emerging Markets practice and a faculty member at Johns Hopkins University, weighed in on misperceptions about investment risks and opportunities in Africa, why trade liberalization is catching on there and what needs to happen to make AfCFTA meet its goals. Broadman is former chief of staff of the President’s Council of Economic Advisers and US Assistant Trade Representative, where he was one of the lead negotiators for the establishment of the WTO and NAFTA, led negotiations for US bilateral investment treaties and served as a member of the Committee on Foreign Investment in the United States.

Let’s start by asking a big-picture question: Why and how is Africa so misunderstood by the rest of the world?

People and investors think of either Africa as one country (it’s actually more than 50) or about the troubled histories across the continent stemming from a colonial heritage. The second school of thought is somewhat understandable. Many African countries are relatively young: the end of colonial rule for a swath of states wasn’t that long ago. Tribal conflicts continue in many places, which makes sense if you figure that some national borders weren’t based on topographical or cultural differences. For the leaders of some of these nascent countries, introducing democracy didn’t come naturally or quickly. Combine that with rampant poverty, a harsh climate in many places, health problems and a lack of infrastructure, and you have your stereotype.

But it’s a stereotype that’s behind the times.

Over the last two decades, a number of African countries have become star economies. In 2019—as was the case in 2018—Sub-Saharan Africa is home to several of the world’s fastest-growing economies. They have matured politically and have rolled up their sleeves to tackle problems like disease and education. They’ve also tried for some time to find ways to trade not just with other parts of the world but with other parts of Africa. Which brings us to the current moment—and the trade agreement.

The big goal of AfCFTA is to increase intracontinental trade. Why is that important?

Across Africa, economic growth for years had been driven by production of agricultural commodities, minerals, and oil and gas—without much diversification. Even a country like Botswana, a relative success story, still gets a high portion of its GDP from diamonds.

To address problems like that, it’s important to look at a more fundamental issue: If you can’t trade among yourselves, which is a real problem in Africa, you’re probably not going to be a competitive force in the global economy. Eighty-five percent of exports from African economies are sold outside the continent—which is almost the opposite of what occurs in other parts of the world

That’s really undergirding the idea of a continental free trade area. Despite the progress of the past couple of decades, Africa is still seriously lacking when it comes to infrastructure that connects neighboring countries. For instance, there are situations where there is a railroad of one gauge in one country and a railroad of a completely different gauge the next country over. That’s not conducive to cross-border trading.

What does the trade deal mean for the continent? What should we expect in the near future?

The timetable is extraordinarily ambitious—which is fine! If you’re going to set goals for a heroic undertaking, you want ambitious goals. A lot of the formalities for countries joining the agreement have already taken place. Now, we’re down to some tougher discussions.

I’m a big fan of what they’re trying to do, but there’s a risk in their approach. Part of the way you’re successful with trade reforms is to bring along with you the populations of the countries. Setting targets and struggling to meet them can breed cynicism among the populations (i.e., the workers, the businesses, the politicians). If you lose the populations, you undermine support when tougher reforms, which are part of every trade deal, are needed.

And remember that trade negotiations always have delays—just look at the US/China trade talks. Or the United States–Mexico–Canada Agreement—which I prefer to call NAFTA 2.0! So it will be extremely important (and challenging) to interact regularly with the population when course corrections are needed. Communicating poorly or requiring too many changes to the negotiating agenda could really take the wind out of this agreement’s sails.

Given AfCFTA’s potential, what does Africa need to do to make the most of this moment?

The countries need to engage on the ground in a tripartite dialogue—in a decentralized, regionalized and continentalized fashion—with all the relevant stakeholders about the reforms needed, how they should be implemented and the adjustments that will arise. This comes back to what I said about “tougher reforms.”

There will be a new era where firms and workers in Botswana will compete more directly with firms and workers in Zambia, who will complete against their cohorts in Rwanda and so on. The issues of factory restructuring (including closures of some), job dislocation and retraining need to be discussed candidly and transparent solutions put in place in advance.

Importantly, a continental-wide funding mechanism should be established to ameliorate the losses as an integral part of the trade agreement, not as a parallel program, nor on a country-by-country basis. It’s a classic “public good” situation. The continent will be better off, but mechanisms are needed to get from point A to B with as little pain as possible.

It’s also important to be explicit about what the reward will be at point B. That’s part of the reason why there will be delays, and why those delays are necessary to make sure things are done consistently and within a policy framework that promotes economic growth.

Can you expand on why Africa needs to embrace a funding mechanism for trade adjustment assistance that is different from the United States and other nations?

If the real aim is to create an integrated African market, you need an integrated adjustment program for dislocated workers and firms. On this point, Africa should avoid drawing on more advanced economies for inspiration.

In trade deals involving such economies, adjustment mechanisms are the financial responsibility of each trade partner. This leads to tension among the trade partners, and such tensions could be even worse in Africa, where poorer nations would struggle to help those who are negatively affected. Social safety nets in Africa have improved in recent years, but they vary from country to country. As a result, a continent-wide safety net must be a priority for Africa’s leaders before AfCFTA takes effect.

This agreement is a serious bid toward open trade. Does Africa’s move give you hope that the rest of the world might follow suit?

What’s happening in Africa is really a matter of playing catchup. Despite a few hit-or-miss experiments when it comes to intracontinental trade, Africa is simply behind the rest of the world. But it’s an interesting juxtaposition, given protectionism is on the rise in many other places, especially in countries with more advanced economies.

Regarding whether it should be a sign of hope for trade liberalism, the most reasonable answer is that one hopes so. Regrettably, I don’t think the rest of the world is going to be looking at Africa as a trendsetter. While Africa is of increasing importance in the world economy, with some true success stories, it still accounts for only a small portion of the global economic pie. And that won’t change soon.

When will we be able to effectively take stock and know whether AfCFTA worked? Do you have any predictions as to whether it will?

African leaders need to make sure there are explicit performance indicators to measure progress along the way. More important, they need to make sure that if they find they haven’t achieved the hoped-for progress, they have a remedy.

As for how long it will be before we can really say whether the agreement was generally a success or a failure: we’re talking a decade or more.

The key takeaways are that the leaders across the continent should be lauded for doing this, and that the process is as important, if not more important, than the product. If it turns out that only 36 of the 54 countries initially implement such a trade agreement as a “down payment” for the rest of the continent to come on board, that’s a huge success.

It would be great to see all 54 countries come together in one fell swoop. But realistically, some thought might be given to a more evolutionary, concentric-circle kind of approach. Africa’s leaders should be creative about this and keep their eye on the endgame. If the process has to be changed toward this end, so be it.