Question

The biggest economic news in recent history is the formation of the biggest free trade area in the world (the African Continental Free Trade Area, AfCFTA). The UN asserts that the economic bloc currently have a combined business and consumer spending of $4 trillion.

a. Discuss how AfCFTA could be trade creating free trade area. What are the welfare gains? Support your answer with the relevant diagram

b. What if AfCFTA is a trade diversion free trade area? Will this worsen welfare for the bloc? Provide diagrammatic support for your response

Please explain using diagrams.

Answer 1

a).The African Continental Free Trade Area (AFCFTA) agreement will create the largest free trade area in the world measured by the number of countries participating. The pact connects 1.3 billion people across 55 countries with a combined gross domestic product (GDP) valued at US$3.4 trillion. It has the potential to lift 30 million people out of extreme poverty, but achieving its full potential will depend on putting in place significant policy reforms and trade facilitation measures.

The scope of AFCFTA is large. The agreement will reduce tariffs among member countries and cover policy areas such as trade facilitation and services, as well as regu­latory measures such as sanitary standards and technical barriers to trade. Full implementation of AFCFTA would reshape markets and economies across the region and boost output in the services, manufacturing and natural resources sectors.

As the global economy is in turmoil due to the COVID-19 pandemic, creation of the vast AFCFTA regional mar­ket is a major opportunity to help African countries diversify their exports, accelerate growth, and attract foreign direct investment.

   WELFARE GAINS

The World Bank report, The African Continental Free Trade Area: Economic and Distributional Effects, is designed to guide policymakers in implementing policies that can maximize the agreement’s potential gains while minimizing risks. Creating a continent-wide market will require a determined effort to reduce all trade costs. Governments will also need to design policies to increase the readiness of their workforces to take advantage of new opportunities.

Key Findings

The African Continental Free Trade Agreement represents a major opportunity for countries to boost growth, reduce poverty, and broaden economic inclusion. Implementing AFCFTA would:

· Lift 30 million Africans out of extreme poverty and boost the incomes of nearly 68 million others who live on less than $5.50 a day;

· Boost Africa’s income by $450 billion by 2035 (a gain of 7 percent) while adding $76 billion to the income of the rest of the world.

· Increase Africa’s exports by $560 billion, mostly in manufacturing.

· Spur larger wage gains for women (10.5 percent) than for men (9.9 percent).

· Boost wages for both skilled and unskilled workers—10.3 percent for unskilled workers, and 9.8 percent for skilled workers.

Under AFCFTA, extreme poverty would decline across the continent—with the biggest improvements in countries with currently high poverty rates.

· West Africa would see the biggest decline in the number of people living in extreme poverty—a decline of 12 million (more than a third of the total for all of Africa).

· Central Africa would see a decline of 9.3 million.

· Eastern Africa would see a decline of 4.8 million.

· Southern Africa would see a decline of 3.9 million.

· Countries with the highest initial poverty rates, would see the biggest declines in poverty rates.

· In Guinea-Bissau, the rate would decline from 37.9 percent to 27.7 percent

· In Mali, the rate would decline from 14.4 percent to 6.8 percent.

· In Togo, it would decline from 24.1 percent to 16.9 percent.

Of the $450 billion in income gains from AFCFTA, $292 billion would come from stronger trade facilitation—measures to reduce red tape and simplify customs procedures.

· Tariff liberalization is important, but by itself it would boost the continent’s income by just 0.2 percent.

· Adding trade facilitation to the mix—including measures to reduce red tape, simplify customs procedures, and make it easier for African businesses to integrate into global supply chains—would boost the income gains by $292 billion.

· These gains will require major efforts by countries to reduce the burden on businesses and traders to cross borders, quickly, safely, and with minimal interference by officials.

The World Bank report is designed to guide policymakers in implementing policies that can maximize the agreement’s potential gains while minimizing risks.

· Creating a continent-wide market will require a determined effort to reduce all trade costs. In general, this will require legislation and regulations to enable the free flow of goods, capital and information across borders; create competitive business environments that can boost productivity and investment; and promote increased foreign competition and foreign direct investment that can raise productivity and innovation by domestic firms.

· In a few sectors facing job losses, governments will need to be ready to support workers with adequate safety nets and policies to retrain workers.  

· Governments will need to design policies to increase the readiness of their workforces to take advantage of new opportunities.

Achieving the gains from AFCFTA is especially important due to the COVID-19 pandemic, which is expected to cause up to $79 billion in output losses in Africa in 2020 alone.

· COVID-19 has caused major disruptions to trade across the continent, including in critical goods such as medical supplies and food.

· By increasing regional trade, lowering trade costs and streamlining border procedures, full implementation of AFCFTA would help African countries increase their resiliency in the face of future economic shocks and help usher in the kinds of deep reforms that are necessary to enhance long-term growth.

Data

Income gains due to AFCFTA in 2035

By country,% change with respect to baseline scenario

Notes:1.) NTMS stands for Non-tariff measures,and TF stands for Trade Facilitation 2.).The graph shows % changes with respect to the baseline scenario in 2035.The baseline scenario does not have policy intervention, such as Tariffs,NTMS,and trade facilitation measures.

B).

Over the past decade and half, global merchandise trade has grown substantially, from US$ 13

trillion in 2000 to reach an all-time peak of US$ 38 trillion in 2014 (UNCTAD, 2019), before

dropping to US$ 33 and US$ 32 trillion in 2015 and 2016, respectively. It then increased to US$

36 trillion in 2017 (UNCTAD, 2019).

Over the past decade and half, global merchandise trade has grown substantially, from US$ 13

trillion in 2000 to reach an all-time peak of US$ 38 trillion in 2014 (UNCTAD, 2019), before

dropping to US$ 33 and US$ 32 trillion in 2015 and 2016, respectively. It then increased to US$

36 trillion in 2017 (UNCTAD, 2019).

Over the past decade and half, global merchandise trade has grown substantially, from US$ 13

trillion in 2000 to reach an all-time peak of US$ 38 trillion in 2014 (UNCTAD, 2019), before

dropping to US$ 33 and US$ 32 trillion in 2015 and 2016, respectively. It then increased to US$

36 trillion in 2017 (UNCTAD, 2019).

ver the past decade and half, global merchandise trade has grown substantially, from US$ 13

trillion in 2000 to reach an all-time peak of US$ 38 trillion in 2014 (UNCTAD, 2019), before

dropping to US$ 33 and US$ 32 trillion in 2015 and 2016, respectively. It then increased to US$

ver the past decade and half, global merchandise trade has grown substantially, from US$ 13

trillion in 2000 to reach an all-time peak of US$ 38 trillion in 2014 (UNCTAD, 2019), before

dropping to US$ 33 and US$ 32 trillion in 2015 and 2016, respectively. It then increased to US$

ver the past decade and half, global merchandise trade has grown substantially, from US$ 13

trillion in 2000 to reach an all-time peak of US$ 38 trillion in 2014 (UNCTAD, 2019), before

dropping to US$ 33 and US$ 32 trillion in 2015 and 2016, respectively. It then increased to US$

b).Over the past decade and half, global merchandise trade has grown substantially, from US$ 13 trillion in 2000 to reach an all-time peak of US$ 38 trillion in 2014 (UNCTAD, 2019), before dropping to US$ 33 and US$ 32 trillion in 2015 and 2016, respectively. It then increased to US$ 36 trillion in 2017 (UNCTAD, 2019).

In line with this global trend, Africa’s merchandise trade has also shown a marked increase over this period. It increased from US$ 278 billion in 2000 to reach an all-time peak of US$ 1.3 trillion in 2014 (UNCTAD, 2019). After a successive trade downturn in 2015 and 2016, Africa’s merchandise trade rebounded and stood at US$ 948 billion in 2017, which is 33 percent lower than the historic high recorded in 2014 (UNCTAD, 2019). Africa’s total merchandise trade performance was poor in the 1980s and early 1990s due to the decline in global commodities prices and the SAPs implemented in that period. Since 2002, the continent saw trade resurgence and excellent growth performance mainly due to global commodity price improvement in this period – that has reversed the deterioration of its terms of trade for last 100 years. This in turn is related to a surge in Chinese demand for such commodities and the continent’s shift in its trade towards these emerging economies.

Despite the substantial increase in Africa’s merchandise trade in absolute terms over the years, Africa’s share of the total global merchandise trade still remains very low (see Figure 1 and Table 1). For instance, in 2017, Africa’s share in the global merchandise trade was only 2.7 percent (see Figure 1), which is negligible compared to the total merchandise trade share of developing Asian region (34 percent), for instance. Developing Asia constitutes the lion’s share (more than 80 percent) of the total merchandise trade of developing economies in 2017.

Figure 1: Merchandise Export and Import and Total Merchandise Trade Share of Africa in the Global Merchandise Trade (in percent)

Even this small global share is dominated by few African countries where the top 18 exporting countries in the continent contributing to 90 percent of the continent’s global trade while the top five exporting countries contributing about 60 percent to this trade, as can be read from UNCTAD data for the period 2014-2017. The recent decline in Africa’s share compared to the level some decades back is the result of a decline in Africa’s market share, export supply constraint that includes logistic hurdles as well as lack of structural transformation that hampered the potential effect of manufactured exports as that of Asia