AfCFTA’s digital trade framework: A crucial tool for Intra-African Trade

AfCFTA’s digital trade framework: A crucial tool for Intra-African Trade

Africa is increasingly embracing digital trade and payments. In today’s interconnected world, digital trade has emerged as a powerful driver of economic growth and development. However, despite Africa’s rich resources and diverse economies, complex regulations, payment barriers, inefficient logistics, and market access barriers hinder intra-African trade.

The African Continental Free Trade Area (AfCFTA) has emerged as a transformative solution to address these challenges. Its Digital Trade Framework is steadily becoming a significant tool that would help in streamlining customs, fostering e-commerce, and enhancing connectivity across African nations.

Intra-African trade faces significant hurdles which result in its limited contribution to overall trade on the continent. In fact, intra-African trade accounts for only 13 percent of total trade before AfCTA became operational, it increased to 20 percent in 2022, but this is relatively low when compared to other regions. For instance, Europe achieved over 70 percent intra-regional trade, North America 30 percent, and Asia 60 percent.

A major challenge hindering intra-African trade is the lack of shared intelligence on port operations and customs regulations. Each African country operates with its own unique set of rules and procedures, this is despite having regional trade agreements in place.

The differences in policies, rules and procedures makes it difficult for African businesses to navigate intra-trade transactions smoothly. This lack of harmonisation leads to delays, increased costs, and inefficiencies in cross-border trade.

For example, a Kenyan businessman who wants to export goods to Cameroon must contend with varying documentation requirements, customs procedures, and port regulations at each step of the process. This fragmented approach to trade creates significant obstacles and discourages businesses from engaging in intra-African trade.

Cross-border payment and settlements for businesses within Africa is a cumbersome process. The African Development Bank(AfDB) found that 48 percent of settlement processes for trading within Africa involve banks outside the continent.

The settlement process involves the use of dollars, the widely accepted legal tender for national and international financial transactions to make payment, which leads to high transaction costs and is still susceptible to delays. Without an efficient and functioning payment system, Africans cannot effectively facilitate regional trade, where there are 42 legal currencies across the continent.

African traders also face challenges with inadequate transport infrastructure, including poor roads, hindering the movement of goods between nations. Additionally, intra-African traders have to deal with protectionist policies implemented by neighbouring countries. For instance, Nigeria imposed high import tariffs on certain goods to protect local industries.

Kenya implemented non-tariff barriers such as strict licensing requirements and product standards. Meanwhile, Tanzania introduced higher tariffs and subsidies on neighbouring countries. Though these measures may offer short-term protection on respective domestic markets, they limit market access, hinder competition, and potentially impede intra-African trade.

The African Union (AU) Assembly recognised the urgent need to overcome these aforesaid challenges and boost intra-African trade. This led to the inclusion of a Digital Trade Framework in the AfCFTA in February 2020. This framework aims to streamline customs procedures, foster e-commerce, and enhance connectivity among African nations.

Moreover, it is essential to consider digitalization’s broad impact on trade. The effective use of information and communication technology (ICT) not only creates new opportunities but also facilitates trade, even when goods or services are not digitally ordered or delivered. This is particularly evident in trade facilitation.

The AfCFTA’s Trade Facilitation Agreement (TFA) encourages State Parties to adopt ICT in customs and related procedures, such as customs information provision, document submission, and goods inspection. These measures aim to promote efficient and cost-effective movement of goods across borders.

For context, the AfCFTA hub, a digital platform, has become operational as a central hub for trade-related information. The portal provides businesses with access to essential data on market opportunities, investment prospects, and regulatory requirements across Africa.

Furthermore, digital trade plays a pivotal role in resolving Africa’s inefficient logistics and transport infrastructure. By embracing digitalization, businesses can overcome physical barriers and navigate the challenges posed by inadequate roads and weak transportation networks.

Digital platforms provide opportunities for streamlined supply chain management, real-time tracking, and efficient inventory management. This enhances the overall logistics process, reduces costs, and facilitates the movement of goods across borders, ultimately fostering increased intra-African trade and economic growth.

Another important element to achieve significant cross-border digital trade in Africa is the existence of an accessible system for making payments. The African Export-Import Bank (AfreximBank) in collaboration with the AU introduced the Pan-African Payment and Settlement System (PAPSS) in January 2022. The PAPSS is a centralised cross-border financial system created to enable payment transactions across the continent.

By adopting the PAPSS system, Africa’s supply chain stands to benefit from increased regional trade and reduced dependence on foreign currencies. The streamlined payment infrastructure encourages seamless transactions between businesses across African countries, leading to amplified trade volumes, enhanced economic cooperation, and improved supply chain integration within the continent. This shift away from relying on the dollar for intra-Africa trade will equally contribute to greater economic independence and stability for African nations.

In a situation where African countries have been able to bridge the gap with digitalization, it would unlock unprecedented opportunities for small and medium-sized enterprises (SMEs). It will give SMEs access to new markets, forge partnerships, and expand their reach. As Africa transitions to digital trade, the AfCFTA stands as a catalyst for this transformation.

The digital leap will give SMEs and startups the springboard to create and market products that create value beyond their own borders. By embracing the digital trade framework, African nations can unleash their economic potential, drive inclusive growth, and position themselves at the forefront of the global digital revolution.

Read also: PMI lists project managers, infrastructure as keys to accelerating AFCFTA implementation

Moreover, the AfCFTA’s comprehensive coverage of digital trade, including trade in goods, services, intellectual property rights (IPRs) protection, and investment promotion, plays a crucial role in encouraging innovation and investments within Africa. Traders and investors gain confidence and predictability in the treatment of their goods, services, and property rights.

The Protocol on E-commerce is particularly significant, as it establishes harmonised rules and guidelines for scaling up the share of digital trade across the continent. These rules can guide the development and implementation of national policies, fostering a conducive environment for digital trade to thrive.

As the world increasingly embraces the digital economy, Africa stands poised to capitalise on its potential. The AfCFTA’s digital trade framework serves as a springboard that would propel Africa into the realm of digital trade and unlock new opportunities for intra-African commerce. Meanwhile, operationalising digital trade in Africa is a sureway to resolve the challenges of intra-African trade.

Mohammed is a master’s student at the University of East Anglia, and a Free Trade Fellow at Ominira Initiative.

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