Examine the major principles behind the AGOA and AFCFTA and

how it has impacted African Economies

Introduction

On the vast and diverse continent of Africa, where commercial integration has long been
considered a key to long-term prosperity and the eradication of poverty, Africa stands out in at
least four ways, perhaps unlike other regions that have pursued deeper trade integration:
heterogeneity in country size, income levels/development, and trade openness; diversity in
trade regimes and trade policies; intra-regional trade patterns; and the lack of a significant
continent-wide trading hub. In terms of size, wealth, and openness, the continent is home to a
wide diversity of nations. Africa only accounts for 5% of global revenue despite having 16%
of the global population. A total of 27 African countries, or 50% of the continent's total
population, are categorized as low-income. The remaining portion is split into lower-middle-
income (18 countries, representing 45.9% of the world's population), upper-middle-income (8
countries, or 9.5 percent of the world's population), and high-income countries (1 country with
0.01 percent of the population).

The continent is also notable for its extensive diversity of trade agreements and trade rules.
Its divide is the result of decisions made during its colonial past. Three key characteristics best
describe the trading regimes on the continent. The first are preferential trade agreements
between certain African countries and others outside the continent. The African Growth and
Opportunity Act stipulates agreements under the General System of Preferences (GSP), duty-
free treatment for least developed countries (LDCs), and other comparable clauses that grant
preferred access to the US market (AGOA). The second alternative is regional trade agreements
between African countries and those outside of Africa.

AFRICAN CONTINENTAL FREE TRADE AREA

The Assembly of Heads of State and Government endorsed the Framework, Road Map, and
Architecture for Fast Tracking the Creation of the African Continental Free Trade Area on
January 29 and 30 in Addis Abeba, Ethiopia, as well as the Action Plan for Increasing Intra-
African Trade. The Continental Free Trade Area was discussed at the 25th Ordinary Session
of the Assembly of Heads of State and Government of the African Union, which took place in
Johannesburg, South Africa, from June 14–15, 2015, with the aim of uniting the continent's
markets. They acknowledged the need to create precise, open, predictable, and advantageous
standards to govern trade in commodities and services, competition policy, investment, and
intellectual property among State Parties in order to achieve policy consistency, including
relationships with third parties. It was established as a symbol of international security,
democracy, human rights, gender equality, and the rule of law for the expansion of global trade
and economic cooperation.

The African Continental Free Trade Area (AFCFTA) agreement was signed on March 21 by
representatives of more than 40 of the 55 African Union (AU) members. With a combined
current GDP of $2.5 trillion, 55 African countries, and a population of over one billion people,
60% of whom are under the age of 25, the AFCFTA is anticipated to include all 55 African
countries. Africa has recently been recognized as a region with enormous untapped potential,
even in the absence of any free trade agreements (McKinsey, 2018). The continent's economic
potential may be realized with the aid of the AFCFTA. It has the potential to increase Africa's
low productivity and promote more investment, which would raise income levels and decrease
poverty.

African Continental Free Trade aims to create a single market for goods and services that is
enabled by the free movement of people in order to advance the economic integration of the
African continent and in accordance with Pan-African Agenda 2063's Pan-African Vision of
"An integrated, prosperous, and peaceful Africa." In addition to laying the groundwork for the
eventual establishment of a Continental Customs Union, it was created to liberalize the market
for goods and services, to encourage the movement of capital, natural persons, and investments,
to build on the initiatives and developments in the State Parties and RECs (Regional Economic
Communities), and to enhance the competitiveness of the economies of the State Parties both
within the continent and globally.

Major Principles of AFCFTA

The following principles will govern the AFCFTA, according to Article 5: driven by African
Union Member States; RECs FTAs as AFCFTA building blocks; variable geometry; flexibility
and special and differential treatment; transparency and disclosure of information; preservation
of the acquis; most-favorable-nation (MFN) treatment; national treatment; reciprocity;
substantial liberalization; the consensus in decision-making; and best practices in the sector.
 Significant liberalization is the reduction or elimination of trade restrictions like tariffs,
quotas, and other trade barriers that hinder the movement of products, services, and investments
between African nations. Significant liberalization aims to enhance trade and investment
between African nations, promoting economic development and progress. This is a crucial
principle of the AFCFTA, and its implementation is expected to bring significant benefits to
African economies and to the African continent as a whole.

All members are treated equally in the international commerce of products and services
under the MFN system. This implies that a member state is prohibited from favouring one
member state over the others in trade negotiations. For instance, if one member state's import
duties are cut, the country must provide the same reduced tariffs to all other member states. By
adhering to this idea, commerce between African nations will be treated equally and trade blocs
will not form on the continent.

Impacts of AFCFTA on African economies

The agreement only came into effect on January 1st, 2021. However, there are some early
indications of positive effects, such as increased trade and investment flows, as well as efforts
by governments to harmonize policies and regularisation.

On January 1st, 2021, the agreement only recently went into force. There are, however, some
early signs of favorable outcomes, including a rise in trade and investment flows as well as
government initiatives to unify policies and regularization.

The African Continental Free Trade Area (AFCFTA) agreement will create the largest free
trade area in the world based on the number of participating countries. The pact connects 1.3
billion individuals in 55 different countries with a total GDP of US$3.4 trillion. It has the
potential to save 30 million people from the depths of extreme poverty, but in order to fully
realize its potential, significant political adjustments and steps to promote commerce would be
required. The establishment of the sizable AFCFTA regional market is a significant chance to
assist African nations in diversifying their exports, accelerating growth, and luring foreign
direct investment at a time when the world economy is in disarray owing to the COVID-19
epidemic.

The introduction of the AFCFTA would increase the pay and employment opportunities for
unskilled workers while also helping to close the gender wage gap. All over the continent, the
proportion of individuals employed in energy-intensive industries would increase. There would
be an increase in agricultural employment in 60% of the countries, and in those countries,
salaries for unskilled labor would rise faster. By 2035, the wages of unskilled workers would
increase by 10.3% in comparison to the baseline, while those of skilled workers would increase
by 9.8%. Wages for women would rise a little faster than for men as output rises in significant
enterprises where women are heavily engaged. . By 2035, women's salaries would rise by 10.5
percent relative to the baseline, while men's wages would rise by 9.9 percent.

Projected Impacts of AFCFTA on FDI (Foreign Direct Investment)

Africa will become less vulnerable to a commodities-driven boom and bust thanks to the
AFCFTA's assistance in diversifying the FDI it draws outside its natural resources.

FDI is currently the most crucial component in ending Africa's reliance on aid and handouts.
It is significant because it will lessen the strain that mounting debt is putting on African
economies. FDI is anticipated to deliver new resources, innovative technologies, and improved
skills that will boost living standards and lessen reliance on primary and commodity exports in
Africa. The AFCFTA may encourage more foreign direct investment (FDI) into new markets
for goods and services that are more export- and efficiency-focused. Due to the expansion of
intra-African FDI from a low base, Asia is now a key source of FDI for Africa. Africa's foreign
direct investment (FDI) balance has evolved, shifting away from resource investments and
toward investments that are more concentrated on local manufacturing and service industries.
The AFCFTA will have a variety of effects on FDI in Africa. Trade liberalization has varying
effects on FDI depending on characteristics such as investor incentives, where they are located,
the relative level of development and attractiveness of the nations involved, and other
considerations. These consequences in this circumstance are difficult to distinguish due to the
intricacy of current intra-African trade agreements, liberalization timelines, and concerns
surrounding the AFCFTA's investment protocol. By establishing in an African nation, global
investors now have greater access to a larger market thanks to the AFCFTA. By making it
easier to acquire inputs from all over the continent, it may also make Africa more alluring to
efficiency-seeking outside investors. At the same time, the AFCFTA may lessen incentives for
African manufacturing businesses looking to expand into local markets to set up subsidiaries
in other African nations by lowering trade obstacles, at least in theory. The small amount of
intra-African FDI already invested in manufacturing, however, shows that there is little "tariff-
jumping" FDI that would be affected by this approach. Additionally, given the importance of
FDI in the services sector and the fact that providing services typically necessitates being close
to customers, this sort of FDI may also rise.

Impact of AFCFTA in Nigeria

On July 7, 2019, Nigeria ratified the AFCFTA, becoming its 32nd member. Nigeria, whose
intra-African trade is currently limited, stands to benefit from the AFCFTA through expanded
access to more affordable goods and services from other African nations. As of 2018, Nigeria's
imports from the African continent as a percentage of all imports were 3.2 percent, while its
exports to the continent as a percentage of all exports were 13.2 percent. Furthermore, China
was Nigeria's top trading partner in 2020. The AFCFTA is anticipated to improve intra-African
trade and investment, decrease poverty, and boost business competitiveness.

Post Covid 19 impacts of AFCFTA

The COVID-19 pandemic's effects on the economy and public health greatly increased
the number of individuals in Africa who live in extreme poverty. With a purchasing power
parity poverty criterion of US$1.90 per day, Africa's extreme poverty headcount ratio fell from
40.2 percent in 2010 to 34.1 percent by 2019. Implementing the AFCFTA trade scenario could
assist in removing 40 million people from extreme poverty by 2035 in a post-COVID-19

environment. According to the graph below (Source: AFCFTA), 277 million people will be
living in extreme poverty by 2035 (equal to 14.8% of the population living in poverty), which
is 40 million less than under the baseline scenario (in the figure above).

By 2035, the AFCFTA FDI deep scenario and the AFCFTA FDI broad scenario may be able
to help an extra 5 million and 10 million people escape extreme poverty, respectively. In terms
of reducing poverty, it is predicted that 272 million fewer people will be living in extreme
poverty by 2035 under the AFCFTA FDI broad scenario than under the AFCFTA trade
scenario.
 However, a 2020 piece by Nassim Oulmane, Mustapha Sadni, and Patrice argue that the
AFCFTA’s boost to Intra-African trade might actually mitigate the rapid decline in GDP
caused by COVID-19 and subsequent social-distancing policies and border closures.

In conclusion, there are three main problems with the AFCFTA that have been documented:
first, the rules of origin negotiations seemed to drag on forever. A total of 3,800 tariff lines and
87.7% of the AFCFTA-covered items' rules of origin were settled in 2022. Second, the
AFCFTA, like the AU as a whole, suffers from a lack of widespread perception regarding its
benefits across the board. According to a research, more than 60% of Nigerian business owners
are ignorant of the FTA and its advantages. According to the Africa CEO Trade Report 2022,
more money has to be invested in educating businesses. Thirdly, the infrastructure for customs
to carry out AFCFTA requirements is sluggish. . A few countries have the infrastructure and
systemic capabilities for trade facilitation as required by the AFCFTA indicators.

AGOA (African Growth and Opportunity act)

On May 18, 2000, the AGAO was ratified into Title 1 of the United States Trade and
Development Act. It is a cornerstone of US efforts to improve relations with Africa. With this
law, African nations will be able to better formulate their economic policies, embrace
globalization, and maintain long-term political and economic stability. AGAO offers expanded
privileged access for exports from Africa to the US.

Prior to AGOA, 48 sub-Saharan African nations were given preferred access to US markets
under the generalized system of Preferences, essentially paying zero tariffs subject to specific
requirements for a variety of goods (GSP). Out of the 23 billion dollars in overall exports from
Africa in 2000, the GSP covered around 4 billion dollars. African exporters had a 5 percent
edge over those from other most-favoured nations (MFN) (the average MFN tariff rate).

A crucial element of the contemporary multilateral trading system is the Most Favoured
Nation (MFN) clause found in Article 1 of the General Agreement on Tariffs and Trade
(GATT). The principle of non-discrimination, which forbids nations from treating trading
partners differently, forms the basis of the MFN clause. In other words, if a nation offers a
trading partner and unique concession, the MFN provision obliges them to do the same for
other WTO members. The latest MFN exception, known as AGOA, gives a small group of sub-
Saharan African nation’s preferential access to the American market.
 In the middle of the 20th century, the case for providing emerging nations with preferential
market access arose. Preferences were viewed as a mechanism to integrate newly independent
African and Asian countries into the international trading system while also quickly increasing
their industrial capabilities. In light of this, the United Nations Conference on Trade and
Development (UNCTAD) developed the general framework for the GSP in 1968. In 1974, the
US approved laws establishing its GSP scheme. Eligible nations pay zero taxes on 4,650 tariff
lines or goods under the US system of preferences. They developed some measures in addition
to the US preferences, with AGOA being one of them in 2000. The goal of AGOA was to
increase exports from SSA (Sub-Saharan Africa) by giving eligible nations preferential access
to the US market above and beyond what is provided to the majority of LDC (Least Developed
Countries).

Major Principles of AGOA

1) Market Access: AGOA provides duty-free access to the US market for eligible
African Countries, allowing them to increase their exports and participate in the global
economy. This means that eligible African countries are able to export certain goods
to the US market without paying tariffs, making their product more competitive in the
US market. AGOA provides duty-free access to a wide range of products, including
textiles and apparel, footwear, leather goods, and various agricultural and non-
agricultural products.
2) Trade Capacity Building: AGOA aims to build the trade capacity of African
countries by providing technical assistance and support for trade -related infrastructure
and institutions.
3) Economic Reform: AGOA encourages economic reform in eligible African countries,
such as reducing barriers to trade and investment, and promoting good governance
and human rights.
4) Private sector Development: AGOA supports private sector development in African
countries by providing incentives for investment and entrepreneurship.
5) Regional integration: AGOA promotes regional integration in Africa by encouraging
trade among African countries and between Africa and the rest of the world.
6) Partnership: AGOA is based on a partnership between the United States and eligible
African countries with the goal of promoting economic growth and development in
Africa.
 7) Flexibility: AGOA provides flexibility for eligible African countries to participate in
the program based on their individual circumstances and needs.

Impact of AGOA on the African economy

1. Increased export
Exports of qualifying commodities to the US have increased as a result of AGOA,
strengthening the economy of participating nations. Exports were valued at over $27.4
billion, compared to $18.4 billion in 2020. In order to achieve more sustainable
economic growth, AGOA has urged African nations to diversify their exports beyond
conventional commodities. In the nations that gain from the legislation, more jobs have
been created, particularly in the textile and garment sectors.

The diagram below shows the leading AGOA exporters:

Source: agoa.info

2. Investment
Many African nations had to invest in infrastructure, such as ports, roads, and
power supply, in order to take advantage of the advantages provided by AGOA, which
had a favourable effect on their economies. African nations have benefited
economically from AGOA's encouragement of foreign investment, particularly in the
textile and garment sectors. The AGOA has aided in raising the competitiveness of
 African nations, making their products more appealing to US consumers by granting
duty-free access to the US market.

3. Negative Effects

Nevertheless, there are negative effects which is that only a few African nations have
gained considerably from AGOA because many have been unable to take advantage of the
opportunities it offers. The emphasis on exporting to the US has resulted in an over-dependence
on the US market, which can be problematic in the event of a US economic collapse. Because
so many have been unable to profit from its advantages, AGOA has not been successful in
fostering competitiveness among African nations. Overall, AGOA has had a conflicted effect
on African economies, with the advantages going to a select few nations and sectors.

Frazer and Van Biesebroeck (2007) claim that AGOA had a negligible but beneficial effect
on exports from Sub-Saharan Africa to the US. They discover that the amount of the absolute
export growth between 2000 and 2006 that can be directly attributable to AGOA is $439
million, or 8% of the growth in SSA's non-oil exports during this time. The authors calculated
that the gain brought about by AGOA was worth roughly 0.15 percent of the GDP of all
AGOA-eligible nations in 2000.

In conclusion, Fayissa and Tadesse (2007) found that the AGOA co-efficient is significant
and positive for 14 of the 32 product categories and negative for only 3 goods. They claimed
that 24 out of the 99 product categories were significantly affected by AGOA's trade initiation
impacts. The authors, therefore, came to the conclusion that the ability of African policymakers
to build on the trade initiation impact of AGOA thus far will determine the success of AGOA
in further growing SSA exports to the US.

REFERENCES

1) Albert Zeufack (July 27, 2020). The World Bank: The African Continental Free Trade
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Economies of Africa. Accessed on 10th of February, 2023 on cseaafrica.org
3) Eckart Nauman (Feb 23, 2022). Update on the African Growth and Opportunity Act
(AGOA) and related developments- perspectives on Africa’s trade and integration.
www.tralac.org
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