Free Trade Agreements and Their Effects: How Time Matters For AfCFTA

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November 1, 2023 - Author: Evans Osabuohien, <olabisim@msu.edu>, <lliverp@msu.edu>

EXECUTIVE SUMMARY

Trade happens when markets for goods and services exist, and when the cost of reaching those markets is not prohibitive—that is, when the purchasing power and propensity to consume goods and services is available, and when the intent to supply is not thwarted by trade barriers. To set expectations on the benefits of the African Continental Free Trade Agreement (AfCFTA), we focus on how the agreement can improve trade. Much has been said about Africa as an untapped market; an emerging middle class in many African countries indicates that the continent is home to lucrative growing markets that hold over a billion consumers. In principle, more trade should emerge directly, once an agreement comes along like AfCFTA, that aims to reduce trade barriers among African countries, or at the least, to reduce policy-related barriers. Our work explores how practice may deviate even in small ways from principle.

The adoption of AfCFTA is centered on two policy questions: a) will more trade boost growth and reduce poverty in Africa? and b) will a reduction in tariffs, quotas, and other policy-linked barriers boost trade? Each question carries much weight on its own, and each has the potential for complexity—such that an answer that works for one specific region or country may not work in another. Thus, this study limits itself to claims that are general in nature and broadly applicable to the areas that we study.

This study accepts the motivation for AfCFTA as valid. We do not reevaluate the premise that helping African countries to trade more, holds the promise of helping countries do better economically. The valid concern that might remain for the AfCFTA is how soon the benefits appear, and whether other micro- or macro-economic issues get in the way of realizing the promised benefits of the agreement. This premise explains how we estimate the impact on trade from adopting a Free Trade Agreement (FTA) like AfCFTA. We find differences in the timing of the trade gains that come with FTAs. The time-dependent effects vary for each of the trade flow types that we construct (i.e., all trade, non-African trade, intraAfrican trade, and Africa-rest of the world trade). The findings indicate that agreements like AfCFTA would not result in benefits for African economies without timely implementation. We observe a robust direct link between FTA implementation and trade, with an approximately 6% increase in trade flows. We also observed a robust effect of FTAs on intra-African trade, with a notable increase in trade flow values of over 100% relative to other flows, but with a three-year lag.

Finally, the report focuses on the trade of the agrifood sector, as well as prospects for micro-, small, and medium-sized enterprises (MSMEs). It appears to be the sector with the greatest potential for poverty reduction if trade leads to growth. Gains from trade will first affect the sectors that trade— and the sector that engages the highest number of Africans, is agriculture. Our results show that, unlike non-African trade with the effects significant in the first two years, the benefit for intraAfrican trade is prominent at the fifth year of the treaty going into effect. It takes time to reduce the barriers like quality standards and administrative procedures most relevant to agricultural trade. Therefore, the report calls for policy support to facilitate growth pathways for MSMEs.

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