Welfare Decomposition of the Continental Free Trade Area

The Continental Free Trade Area (CFTA) is set to be launched in 2017, culminating ultimately into duty free quota free trade among African countries. The rationale for the establishment of the African mega-regional trade agreement is boost intra-African trade beyond the current levels of 13% and improve welfare of Africans. This study makes using of the Dynamic GTAP model to simulate the welfare effects of hundred percent tariff liberalisation. Results, measured through the equivalent variation, show that all African countries benefit -on a varying scale- from increases in labour demand, capital accumulation, terms of trade, and allocative efficiencies. However, many countries experience huge revenue losses from tariff liberalisation, and this tends to water down gains from other variables. Regional hegemonies in Africa dominate as major gainers in absolute terms, in the CFTA hundred percent tariff liberalisation, notably South Africa in Southern Africa, Kenya in East Africa, and Nigeria in West Africa. However, the magnitude could be higher if tariff liberalisation is coupled with infrastructure development in the widest sense, and removal of NTBs as part of the broader trade facilitation processes. And in order to consolidate these gains, African countries must focus on export diversification, conflict, border issues, and financial constraint.