After several delays and postponements, trading under the African Continental Free Trade Area (“AfCFTA”) finally commenced on the 1st of January 2021. The long-awaited trading has been a historic event for African States and Small and Medium-sized Enterprises (SMEs) in Africa. SMEs represent about 80 percent of Africa’s businesses and are responsible for more than 80% of Africa’s employment and 50% of its GDP. Notwithstanding this most SMEs on the African continent struggle to grow and expand because of multiple barriers that limit their capacity to compete on the market and trade with other neighbouring African countries.This is unfortunate as SMEs play a crucial role in African trade but are disproportionately impacted by non-tariff barriers (NTBs) due to their limited resources and access to information.
Any economic policy that facilitates imports and exports among member countries with lower or no tariffs, free access to the market and market information, and the elimination of trade barriers offers numerous benefits to SMEs. SMEs are akey beneficiary of the AfCFTA as the free-trade area provides significant opportunities for growth. One of the biggest opportunities offered by the AfCFTA is market access. Under the free-trade zone SMEs will be exposed to a more expanded market which is estimated to be as large as 1.3 billion people across Africa, with a combined gross domestic product (GDP) of $3.4 trillion. Further, trading under the AfCFTA provides for open borders, improved contracts, and better structured value chains which are key benefits for SMEs to grow.
One of the main objectives of the AfCFTA is to increase Africa’s intra-continental trade by 52.3 percent by 2022. SMEs will thus benefit from this as they will be able to increase their sales and boost their business because of their capacity to reach consumers from all over the continent.Further, local SMEs will benefit from partnerships with potential foreign investors who would want to invest or launch their businesses in Africa. For example, the Nigerian government has imposed some restrictions on imported manufactured goods to drive foreign investors to invest in manufactured products in Nigeria or to partner with local businesses. As a result, there will be a significant boost in business and transfer of skills and technology through SMEs’ partnerships with potential foreign investors.
Increased intra- African trade will increase the economies of scale and provide an access to cheaper raw materials and intermediate inputs. The free trade also offers better conditions for regional value chains and integration into global value chains, catalysing the transformation of SMEstowards greater utilization of technology and knowledge,facilitating both intra-African and external direct capital flows. This in-turn creates a labour market and a demand pull throughout the continent. Further, the AfCFTA will increasefacilitate exports diversification which gives SMEs an opportunity to expand their markets.
Furthermore, the reduction of tariff revenues collected by African countries on intra-African trade will make it easier for more SMEs to actively participate in the economy by ensuring a fairer distribution of the gains from free trade. The AfCFTA will provide greater support for trade facilitation and exchange ofinformation from the pan-African, regional and local bureaucracies which will be a great incentive for SMEsparticipation.
To ensure that SMEs can fully take advantage of the African Free Trade Area, it is important that SMEs understand what the AfCFTA entails and what the future negotiations will cover. SMEs should also ensure that their representatives participate as governments craft and operationalize the agreement. To do that, they need to be fully aware of the issues, potential benefits and opportunities and, most importantly, the role they can play. Although a true continent-wide free trade area may take time with many challenges, there appears clear progress towards success, promising economic benefits for SMEs across the Continent.
Article by Chido Pamela Mafongoya
Lex Amicus 