Potential trade, welfare and revenue implications of the African Continental Free Trade Area (AfCFTA) for Ghana: An application of partial equilibrium model

• Published date: 01 February 2022
• Author: Nimonka Bayale,Muazu Ibrahim,Joseph Atta‐Mensah
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2385

ACADEMIC PAPER

Potential trade, welfare and revenue implications

of the African Continental Free Trade Area (AfCFTA)

for Ghana: An application of partial equilibrium model

Nimonka Bayale

1,2

| Muazu Ibrahim

1,3

| Joseph Atta-Mensah

1

1

Macroeconomic and Governance Division

(MGD), United Nations Economic Commission

for Africa (UNECA), Addis Ababa, Ethiopia

2

Department of Economics, University of Kara,

Kara, Togo

3

School of Business and Law, Department of

Banking and Finance, University for

Development Studies, Wa, Upper West

Region, Ghana

Correspondence

Muazu Ibrahim, Macroeconomic and

Governance Division (MGD), United Nations

Economic Commission for Africa (UNECA),

Addis Ababa, Ethiopia.

Email: imuazu@uds.edu.gh, muazu.ibrahim@

un.org

This study estimates the potential implications of the implementation of African

Continental Free Trade Area (AfCFTA) Agreement for Ghana in terms of trade,

welfare and revenue effects. By applying the WITS-SMART simulation model on

2018 disaggregated international trade data, the paper finds that total trade effects

in Ghana are likely to surge by US$ 148.3 million while promoting consumers' welfare

by US$ 8.597 million. However, revenue losses are imminent as the country might

experience a drop in tariff revenue of US$ 8.604 million. Overall, the free trade area

is expected to improve on the country's trade balance as exports are envisaged to

outweigh imports. In order to mitigate the revenue losses, the paper recommends

that the country keep substantial portion of tariff lines for sensitive and excluded

products over a longer period during the liberalization.

1|INTRODUCTION

"We need to talk about Africa and the AfCFTA. Our Marshall Plan is

the AfCFTA. The AfCFTA is our plan so let us take it and run with it

[Dr. Vera Songwe, Executive Secretary, United Nations Economic

Commission for Africa]"

In March 2018, representatives of member states of the African

Union (AU) signed the African Continental Free Trade Area (AfCFTA)

agreement. This agreement, which provides a charter for trade liberali-

zation in goods and services, is expected to cover all the 55 African

countries. Indeed, the AfCFTA leverages on negotiations of the tripar-

tite free-trade area comprising (a) the Southern African Development

Community (SADC); (b) the Common Market for Eastern and South-

ern Africa (COMESA); and (c) the East African Community (EAC). The

implementation of the AfCFTA within the framework is expected to

achieve the following broad objectives: (a) deepen economic integra-

tion in Africa consistent with Agenda 2063; (b) support future crea-

tion of a continental customs union (c) reduce the challenges of

overlapping memberships in Regional Economic Communities (RECs);

(d) liberalize intra-African trade (e) enhance competitiveness; (f) pro-

mote sustainable and inclusive socio-economic development, gender

equality and structural transformation; (g) deepen the movement of

capital and natural persons and facilitating investment; and

(g) promote industrialization. To achieve these objectives, the AfCFTA

aims to progressively eliminate tariffs and non-tariff barriers to trade

in goods and to liberalize trade in services. Through this, the AfCFTA

aims to establish a single continental market for goods and services,

hence providing larger market access. By providing freer markets, the

AfCFTA is also expected to promote competitiveness at all value

chains in production processes at the industry and enterprise levels

through exploitation of opportunities for scale production and

improved resource reallocation (Arizala, Bellon, & MacDonald, 2019).

In addition, the call for the liberalized trade also has implications

for the prices of traded goods. For instance, Schiff and Winters (2002)

opine that free-trade areas alter the prices of imports for partner

countries on account of the removal of the tariffs. Thus, the effective

reduction in the price changes the composition and pattern of

demand, resulting in adjustment of output and trade flows. Othieno

and Shinyekwa (2011) also argue that, since tariffs are removed for

countries participating in the free-trade area, it permits the entry of

relatively efficient producers into domestic economies where prices

of goods are artificially high. To the extent that AfCFTA ensures lower

trade costs and enhanced access to well-diversified products, the

free-trade area is envisaged to improve the competitiveness of

downstream industries through access to cheaper raw materials for

production. Abrego, Amado, Gursoy, Nicholls, and Perez-Saiz (2019)

Received: 11 May 2020 Revised: 23 June 2020 Accepted: 11 August 2020

DOI: 10.1002/pa.2385

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https://doi.org/10.1002/pa.2385