How AfCFTA will impact African firms

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How AfCFTA will impact African firms


afcfta

The African Continental Free Trade Area (AfCFTA) Secretary-General H.E Wamkele Keabetswe Mene. PHOTO | FRANCIS NDERITU | NMG

Rated as the world’s second-largest free trade area by number of member-states, after the World Trade Organization, and the largest in terms of population and geographic size the African Continental Free Trade Area (AfCFTA) has brough its new opportunities for many businesses in Africa.

AfCFTA is a free trade agreement designed to reduce tariffs on goods and services and eliminate restrictions on the free movement of people and goods among African countries.

The economic significance of an agreement of this magnitude is immense, and if successfully implemented, it is likely to change dramatically the business dynamics within Africa and also between Africa and the world.

But the big question is: How can African firms take advantage of the new opportunities opened by AfCFTA and maximise the benefits of this new reality for themselves and for Africa? To address these questions, it is important to understand the benefits free trade agreements, like AfCFTA.

For the business communities, it reduces the cost of cross-border trade and investment among members to the agreement by lowering and eliminating altogether, custom duties, tariff, and non-tariff barriers. In doing this, AfCFTA is significantly increasing the potential of specialisation and scale.

It is also changing the economic rationale for strategic decisions related to proximity to markets, organisation of the production, and competitive positioning. And it affects the importance of distance and geographic proximity.

While these effects are likely to be felt particularly within Africa, they will have implications also for Africa’s global integration. For large consumer markets, AfCFTA will transform a continent into a gigantic single market of more than 1.4 billion people.

This market size is only slightly below those of India and China respectively. Low costs of crossing-borders among African countries will enables firms to reach out to remote consumers and reap the advantages of scale.

The increase in the size of the market enhances the return on investment in human and physical capital. And increases the economic rationale for developing these assets. Large-scale activity might enable some of the African firms to expand beyond the Continent into the global markets.

It has the potential of increasing specialised production. And the consumption to benefit from specialisation aligned with comparative advantages of African countries.

As well, it would increase the benefits that could be gained by disaggregating the production. The supply chains demand will be increased with the low-cost trade making it economically viable.

The AfCFTA is also bringing in the different competitive dynamics within African countries. By increasing the advantages of scale, AfCFTA is likely to boost the growth of larger firms and trigger consolidation.

Smaller, weaker companies would need to modernize their operating routines. And improve their physical and human capital in order to survive and succeed in the new reality.

It will also change the competitive balance between insiders and outsiders to the AfCFTA agreement that is African and non-African firms.

By giving insiders considerable advantage in competition with imports from outside the continent, AfCFTA is going to will increase the attraction of Africa for foreign firms seeking to become insiders by investing in the continent.

This will increase competitive intensity and raise the bar for excellence, requiring African firms to upgrade their capabilities to succeed in the competition with foreign firms.

The importance of distance and geographic proximity will be liked to the reduction in the costs of crossing borders brought about by trade agreements magnifies the impact of transportation costs on business activity. This will lower the costs of transferring goods, services, capital, and people across borders.

This impact is of particular significance in Africa, whose vast land size is bigger than that of China, Japan, India, the US, and most of Europe combined.

By equalizing the costs of crossing borders across the continent, AfCFTA will increase the benefits of economic relationships within Africa’s sub-regions and accentuating the historical prevalence of these patterns.

This means that AfCFTA will have far-reaching implications for African firms, regardless of their size, industry, and the geographic scope of their activity (whether domestic, regional, or global).

And the impact will be felt differently. The major areas in which this impact will manifest and offered insights are in the ways in which it will affect African firms in their countries.

It is important for the business communities to understand why and how these changes will happen so that African firms can make the most of the new opportunities opened by AfCFTA. And maximize its potential benefits for themselves and for Africa.

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