African leaders have established a single free trade area encompassing 26 countries and 625 million people in eastern and southern Africa. And next week, they'll kick off a process to negotiate an all-Africa trade pact.
African heads of state gathered in the Egyptian resort town of Sharm el Sheikh on Wednesday to sign a milestone trade deal creating a Cairo-to-Cape-Town common market, spanning the eastern half of Africa from Egypt in the north to South Africa in the south.
In 2017, when it comes into force, the common market created by the customs union will encompass 51 percent of the continent's GDP - about $1 trillion annually (884 billion euros) - and a slew of big countries with huge growth potential, such as Ethiopia, Kenya and Mozambique.
"Compared to any other region, Africa has seen the least amount of intra-regional trade - it amounts to only 12 to 14 percent of total trade," according to Razia Khan, head of Africa Economic Research at Standard Chartered bank in London.
Implementation has lagged in previous trade agreements
"Many countries sign up to all of these agreements, but in terms of actual implementation, the record is very different. This is only the beginning of the process - it could be some years before it's fully in effect."
So the key is to watch and see whether countries follow up with implementation, Khan said. Many African countries had signed up to multiple regional trade bloc agreements, but in practice, "they didn't really mean anything," Khan said.
The hope is that by eliminating competition between different trade zones and creating a single larger system, the new agreement will provide an impetus to move ahead with implementing free trade in practice, not just in theory. That should help Africa's global competitiveness as well, Khan said.
Trade links between Africa and China have been multiplying in recent years - and are set to continue growing
More steps to go
The agreement will still have to be ratified by national parliaments over the next two years, but Egyptian trade minister Mounir Fakhry Abdel Nour said that would be a mere formality - "simpler compared with the effort that has gone into preparing the document." He described the deal as a "monumental step" for Africa.
The new agreement represents a fusion of three previous free trade blocs: the East African Community (EAC), Southern African Development Community (SADC), and the Common Market for Eastern and Southern Africa (COMESA). That's why it's called the Tripartite Free Trade Area (TFTA). The three blocs will take alternating turns leading TFTA, and working to reduce customs duties - the hope is to achieve an 85-percent reduction in tariffs within three years - and non-tariff trade barriers such as superfluous paperwork at borders.
What TFTA doesn't include is most of western Africa - including Nigeria, the continent's most populous nation, which has a population of 177 million people and a GDP of nearly $600 billion all by itself. But TFTA is likely to prove a crucial stepping-stone to a pan-African free trade area.
A pan-African trade agreement may help Africa negotiate better trade deals with the rest of the world. The rich OECD countries have long been criticised for neglecting Africa's legitimate interests in access to global markets.
Today eastern and southern Africa, tomorrow all of Africa
African leaders are scheduled to reconvene in Johannesburg, South Africa, on June 14-15 for this year's African Union Summit, where their first order of business will be the launch of a two-year negotiation aimed at agreeing a Continental Free Trade Agreement (CFTA).
African leaders attended an Outreach Conference at the G7 summit at Schloss Elmau last week. Host country Germany mad improved development assistance a key theme for this year's G7 meeting
TFTA took five years to negotiate. CFTA negotiations, in contrast, are expected to take just two years - because they'll build directly on TFTA. That said, CFTA negotiations are not expected to result in completely free trade in the short run - according to Jean-Joseph Boillot, a researcher at CEPII, a French economics think-tank, it could take a decade and a half or more to gradually remove the many non-tariff barriers to trade in Africa.
Boillot is co-author with Stanislas Dembiski of "Chindiafrique", a book published in 2013 that sets out an argument that China, India and Africa will dominate tomorrow's world - certainly demographically and, increasingly, also economically, with growing trade and investment links between the three regions adding to their combined momentum.
The countries encompassed by TFTA are a very mixed lot - ranging from big, population-rich countries like Egypt, Ethiopia, Kenya, DR Congo and South Africa through smaller countries like Malawi, Swaziland, Burundi and Botswana.
The average annual GDP per capita in TFTA is $1,184 - for comparison, Germany's is $44,700 and that of the US is $54,800, according to the CIA World Factbook (2014 figures). But the range of per capita GDP amongst TFTA countries is very wide. Expressed in terms of purchasing power parity, annual GDP per capita ranges from Madagascar's $1,400, Burundi's $900 or D.R. Congo's $700 to South Africa's $12,700 or Egypt's $11,100.
"Purchasing power parity" adjusts nominal GDP to compensate for the fact that whilst incomes are lower in poor countries, so are prices, and official exchange rates between the dollar and local currencies often don't reflect that accurately. For example, Burundi's per capita income as measured at 2014 official exchange rates was only $326, but $326 spent in Burundi would buy the same basket of goods that one would need $900 to buy in the USA.
Hope of increased foreign investment
A key motivation for the establishment of freer trade within Africa is that freer trade and more harmonized markets generate a more compelling case for foreign direct investment. The less businesses have to deal with superfluous paperwork, long delays at borders, and a multiplicity of regulations and officials, the better the business case for investment.
TFTA provides a mechanism for identifying, reporting, monitoring and eliminating non-tariff barriers to trade, officials said. And it aims at raising Africa's share of global trade, which currently stands at just 2 percent.
"What we have realized is that having one trade regime is better than the costly multiple trade regimes," said COMESA Secretary-General Sindiso Ngwenya, a Zimbabwean economist who led the negotiations toward TFTA among the three trade blocs. "We believe that this sends a powerful message that Africa is committed to its economic integration agenda and in creating a conducive environment for trade and investment."