The African Continental Free Trade Area - Opportunities for European Companies

The African Continental Free Trade Area

The African Continental Free Trade Area (AfCFTA) brings new opportunities for trade within the continent. It came into force on the first of January 2021. It also offers some new potential for European businesses.

Goals of the free trade area

The goal of the African Free Trade Area is to exchange more goods within Africa and to build new, international value chains. To achieve this, the member states committed themselves to removing trade barriers. The countries of the African Union are to be economically integrated with each other.
This would create a single market with more than 1.2 billion inhabitants. The gross domestic product of this single market brings with it a lot of growth potential. The GDP growth of some countries in the market is forecast at five to ten percent.
Intra-African trade is to be strengthened by abolishing customs duties between African member states as far as possible. Tariffs on trade goods are to be reduced by up to 90 percent. At present, tariffs between African states are sometimes higher than with third countries outside Africa, which is why it is often cheaper to import from third countries. The African Continental Free Trade Area is therefore intended to strengthen and simplify intra-African trade.

Cross-border trade and investment

Cross-border intra-African trade has so far fallen short of its potential. Many countries export raw materials and agricultural products mainly to non-African countries. In addition, many countries import goods such as capital goods and food products mainly from outside the continent. The free trade agreement aims to make better use of the opportunities and potential of intra-African trade in the future. 

Significance of the African Free Trade Area for European Companies

The removal of tariffs on traded goods will also open up new opportunities for non-African companies. They can take advantage of the new trade potential by producing in Africa. This will enable them to grow faster in Africa and open up new markets more easily.
German foreign investment in Africa is currently lagging behind the opportunities. Less than one percent of foreign investments go to Africa. The new free trade area will provide incentives to expand this.

Opportunities and obstacles for European companies

For European companies, it is worthwhile to look at the new opportunities. This is also shown by the examples of the German companies Volkswagen and Bosch, which are expanding their presence in Africa on a region-specific basis in order to open up new markets. Their investments, such as VW's new assembly plant in Ghana built in the summer of 2020, show that these companies believe in the agreement's prospects for success.
Some obstacles, such as the partly ailing infrastructure and the associated high logistics costs, remain for the time being. Therefore, European companies that want to open up African markets should also think about exchanging ideas with local partners. These have specific local knowledge about markets, risks and opportunities. Local partners help foreign companies to get a better picture of the markets and thus to better recognise the opportunities and better assess the risks.