African Continental Free Trade Agreement Effect on Investment in the Manufacturing Sector of Africa
Abstract:
The African Continental Free Trade Area (AfCFTA) is touted as the seminal project of the African Union (AU)’s development vision and policy roadmap for the continent’s inclusive growth, integration and sustainable development trajectory, known as Agenda 2063 (AfCFTA, 2021). This pact has a coverage of 55 countries with a population of 1.3 billion people across the continent and a potential gross domestic product of approximately US$3.4 trillion [1]. Therefore, when viewed from the number of participating countries, it constitutes the largest free trade area since the advent of the World Trade Organization (WTO). . The AfCFTA aims to promote intra-African trade by reducing tariffs among member states, eliminating non-tariff barriers, reviewing policy constraints, enhancing trade facilitation, and introducing regulatory measures to improve and increase Africa’s output in World trade (AfCFTA, 2022). In the f irst two sections of the paper, we highlight some important structures of trade in Africa. Since long-term economic growth requires an increase in the capital stock, we study foreign direct investment(FDI) flows into Africa in Section 3. In Section 4, we apply a computable general equilibrium (CGE) model to quantify the effects of the AfCFTA on investment, GDP growth, and welfare in Africa and the rest of the world (RoW). The findings show that the intra regional investment in the African Continent is small. The productive sectors of the African economies are mainly powered by investments flowing from outside Africa with limited evidence on how trade effects, including institutional capabilities are developed and sustained by African economies. Applying the latest version of the CGE model GTAP, we quantify substantial positive welfare effects for Africa as a result of eliminating intra-African import tariffs. These welfare improvements are mainly driven by terms-of-trade and employment effects with manufacturing playing a pivotal role. The paper concludes that for the AfCFTA to yield positive welfare effects, Africa requires a harmonised and homogeneous industrial policy framework that facilitates the restructuring of economies from the mining and export of minerals and metals to domestic beneficiation, which requires special human capital factors including, relevant skills, institutional capabilities, infrastructure and technology
