December 13, 2020

The African Continental Free Trade Agreement (AfCFTA) and what it means for Ethiopia


Economic integration and harmonization in Africa maybe the light at the end of the tunnel.

Avatar: Samrawit Behailu
By Samrawit Behailu

Samrawit Behailu is a Junior Associate at Tameru Wondm Agegnehu Law Office and graduate of law from Adama Science and Technology University and has gotten her Masters Degree from Turin School of Development in Italy in International Trade Law.

 The African Continental Free Trade Agreement (AfCFTA) and what it means for Ethiopia

At a time where trade is facing a lot of challenges from trade wars for example like the one China and the United States of America is having right now, countries moving towards protectionist stands such as Brexit , to a global pandemic; economic integration and harmonization in Africa maybe the light at the end of the tunnel. 

On March 21, 2018, the African Union proposed the African Continental Free Trade Agreement (AfCFTA) to its member states, and from the 55 countries, 44 signed Initially. The agreement required members to remove tariffs from ninety percent of goods, so there will be free access to commodities, goods, and services across the continent. The agreed timeframe for achieving this level of ambition is 10 years for Least Developed Countries (LDCs)  and 5 years for non-LDCs. 

The agreement was set to come to force 30 days after 22 of the signatories ratify it. This quota was reached on April 2, 2019, when the Gambia ratified the agreement. Ethiopia ratified the AfCFTA on April 10, 2019. Currently, 54 of the 55 African countries have all signed except Eritrea and of these member states 30 have deposited their instrument of ratification.

Implementation of the AfCFTA was set for July 2020, however, due to covid-19 restrictions and the closing of most borders this was not possible, now the secretary general of the AfCFTA Wamkele Mene said there are plans to finish negotiations on rules of origin, sector specific sectors and  start trading as per the rules of the AfCFTA starting January 2021, but this timeline is dependent on the pandemic.

The general objectives of the AfCFTA  as per article 3 of the agreement include create a single market for goods and services facilitated by the movement of persons deepening the economic integration of the continent, create a liberalized market through multiple rounds of negotiations, support the movement of capital, people, and facilitate investment, go forward with the establishment of a future continental customs union, realize sustainable and inclusive socio-economic development, gender equality, and structural transformations within member states, develop the competitiveness of member states within Africa and in the global market and encourage industrial development through diversification and regional value chain development, agricultural development, and food security and resolve challenges of multiple and overlapping memberships in harmony with regional and continental integration.

Benefits of the AfCFTA

One challenge Ethiopia is facing is its unemployment rate which is expected to reach 21.80% by the end of 2020. An increase in intra-African trade will strengthen the pan African bond for a prosperous Africa as well as, increase the supply chain within the continent which will be a source of employment for the young population of the country, besides, reduce migration of Ethiopian youth outside the continent. The rules of origin instrument of the AfCFTA will also increase foreign direct investment in Ethiopia as more sectors open, which in turn be a source of employment.

 Ethiopia is a country that is home to several brands that are unique to the world and specific to the Ethiopian culture, such as, different coffee, creative arts and clothing brands, with the implementation of the AfCFTA the national bank of Ethiopia may loosen up restrictions for local investors to invest outside Ethiopia, furthermore, the intellectual property rights of these brands will be protected, hence they will be motivated to branch out to the rest of Africa, having a larger platform to sell their products, expand investment, and promote the Ethiopian culture which in turn will boost tourism into Ethiopia.

Ethiopia is currently working on different projects and one is the tourism industry by renovating historical sites and the capital Addis Ababa making it more attractive for tourism, with free movement of people the country’s tourism revenue will increase, this will consequently reduce the burden of foreign currency deficiency the country is facing.

Investment easing under the AfCFTA Investment Protocol promotes and facilitates investment across the continent hindered with various barriers to Foreign Direct Investment (FDI) entry. Continental investment facilitation would help to tackle barriers to investment entry, reduce time and costs of investment authorizations, boost, transparency, improve efficiency, and promote investment-related cooperation and coordination across the continent. The investment facilitation framework in the AfCFTA would be complementary to the proposed multilateral investment framework at the World Trade Organisation.

Challenges of the AfCFTA

Of course the agreement will also have various challenges as it has benefits. Even though Small and Medium Enterprises will be able to use tariff cuts to grow their business they might also be crushed by large corporate companies, because at the moment they are protected by investment laws that hinder foreign investors to be engaged in some sectors, however, the AfCFTA will give foreign investors enhanced access to reserved sectors. The fact that consumers will always prefer cheaper products may also lead to local producers losing huge sales to foreign suppliers because they can lower the cost of their products by leveraging on the reduced tariffs imposed on imported goods. The dumping of cheap products by countries with already established manufacturing industries in smaller nations is a real possibility and is dangerous. It will stall growth and is one of the reasons countries like Nigeria and South Africa were hesitant to sign the agreement.

Ethiopia is in the LDC group that means, the country has about ten years to fully implement the agreement and during this time the country will need to work on creating big multinational companies such as the Ethiopian Airlines that can withstand competition.