Evaluating Trade Policies and Practices in Africa: Insights from the African Continental Free Trade Area (AfCFTA), Export Efficiency and the Impact of the Existing Free Trade Areas

Africa has commonly been an economically fragmented market with limited trade integration compared with other continents. It has been expecting a significant shift after the signing of the African Continental Free Trade Area (AfCFTA) Agreement by all African countries except Eritrea. To begin, the study investigates the impact of the African Continental Free Trade Area (AfCFTA) implementation on Ethiopia's trade performance using a Computable General Equilibrium (CGE) and micro-simulation models. The findings reveal an increase in GDP and welfare gains; the price of imports and government revenue declined; and the price of exports had mixed results. Trade creation occurs in all sectors, except in the extraction sector. Moreover, poverty is declining both in terms of headcount and severity due to the agreement's implementation. While the impacts of perfect and imperfect competition markets are alike, the influence of perfect competition markets is more pronounced. The study also estimates Ethiopia's export efficiency and potential for trade by considering the top forty-six trading partners from 2002 to 2021 using the stochastic frontier gravity model. The analysis indicates that common language, the General System of Preference (GSP), and trade freedom significantly affect Ethiopia’s inefficiency, with a total export inefficiency of 66.7% on average. With Switzerland, Ethiopia has the highest export efficiency (92.1%), followed by Portugal (92%), Jordan (91.8%), and Belgium (91.4%). Furthermore, the study investigates the trade implications of the existing free trade areas (FTAs) by employing the structural gravity model. The findings reveal that all FTAs have significantly boosted trade, with trade expansion varying from a fivefold increase in the Eastern African Community (EAC), the Economic Community of Central African States (ECCAS), and the Southern Africa Development Community (SADC) to a twofold surge in the case of the Common Market for Eastern and Southern Africa (COMESA). There is compelling evidence that the FTA fosters greater trade expansion among border-sharing countries. Overall, the study highlights several strategic issues for Ethiopia to maximize the benefits of trade integration and AfCFTA. These include aligning domestic trade policies with the broader continental agenda; prioritizing products that are liberalized under trade agreements to enhance trade benefits; market structure reforms to improve efficiency; actively implementing trade agreements with countries that have higher export efficiency; and leveraging the continental integration initiatives as a foundation for implementing continental trade agreements while considering the unique contexts of trade partners.