Kigali, 8 October 2015 (ECA) - Reflecting efforts to boost intra-regional trade and investment, 26 African countries have recently agreed to establish a Tripartite Free Trade Area (TFTA) by January 2016. The TFTA agreement comprises the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA), and the Southern African Development Community (SADC). With a total population of 638 million people and a total Gross Domestic Product (GDP) of USD 1.2 trillion, the TFTA will create Africa’s largest free trade area.
In one of the first papers to quantify the potential benefits from the TFTA, Andrew Mold and Rodgers Mukwaya, economists of UN Economic Commission for Africa, suggest the TFTA could boost intra-regional trade by USD 8.5 billion. Particularly interesting is the fact that the economic sectors most likely to benefit are the industrial sectors – such as processed foods, light manufacturing and heavy manufacturing, providing an important impulse to regional industrialisation. The authors also speculate that, if the elimination of tariffs is accompanied by measures to remove non-tariff barriers and infrastructural deficits, the potential gains could be much larger.
The TFTA is estimated to increase regional welfare by US$2.4 billion, with South African consumers being among the main beneficiaries. Other principal beneficiaries include Angola, D.R. Congo, Tanzania and Egypt.
The paper also addresses concerns that industrial production in the TFTA may concentrate in the countries with the highest productivity levels - namely, Egypt and South Africa. The simulation results suggest that these fears are exaggerated, with little evidence of concentration of industries in the larger countries, with only marginal changes in industrial output in the largest countries in the region - in South Africa and Egypt output increases by 0.21 percent and 0.06 percent, respectively.
Why are the changes in output on average so modest? Even after the elimination of tariffs on intra-TFTA trade, the simulation results suggest that the level of intra-regional trade will still be relatively low (barely 12 percent of total trade). And because, with the exception of commodity-exporting activities, traded output in many sectors is still a relatively small share of total output, it implies that the tariff changes on intra-TFTA trade alone have a relatively limited potential to change the overall pattern of trade. This in itself should allay fears of a dramatic concentration of industrial activity through the elimination of tariffs on TFTA trade. But it also highlights the fact that more would need to be done to incentivise both industrialisation and intra-TFTA trade beyond the removal of tariff barriers.
In this sense, it is important to note that the results are dependent on the full implementation of the free-trade area, and contingent on resolving outstanding issues such as regional-wide rules of origin. Issues like this need to be resolved if the TFTA is to reach its full potential. Nonetheless, Mold and Mukwaya's research shows that the TFTA provides an excellent opportunity for countries in the region to increase intra-regional trade, and create a more attractive market for both greater foreign and domestic investment. It is an opportunity which deserves to be seized.
The full paper can be downloaded here:
http://www.nottingham.ac.uk/credit/news/papers/1504.aspx
Issued by:
ECA Sub-Regional Office for Eastern Africa
P.O. Box 4654, Kigali, Rwanda