Can blockchain support Africa’s free trade area?

Africa free trade area

The new Africa Continental Free Trade Area (AfCFTA) promises to be the biggest free trade area based on the number of countries when its implementation reaches full speed.

Having formally launched in July 2019, the Africa free trade agreement is now ready to boost economic growth across the African region.

The goal is to eradicate tariffs by creating a single market for goods and services across 54 African countries, which is estimated to be worth $2.5 trillion. This would also allow business travelers and investors to move freely within the region, with the intention to attract long-term investments. There are also plans to create a continental customs union to streamline trade.

Nigeria, who initially refused to sign the agreement citing pressure from its manufacturer and labor industries finally did so, allowing the African Union (AU) to push forward with the trade.

blockchain trade Africa
Source: McKinsey & Company

While the free trade agreement is expected to boost economic growth and job creation in Africa, it could also aggravate inequalities. For example, liberalisation of trade could greatly damage the most economically-challenged countries within the region. Which is why it is important for the AU to provide supportive policies.

There are many ways that distributed ledger technology (DLT) can support trans-Africa trade. Besides the promise of frictionless cross-border payments, blockchain could improve supply chain transparency and streamline trade processes. It also holds the potential to reduce costs and corruption, detect tax evasion and improve the security of data.

Improving trust in cross-border trade

Like in many industries, doing business without trust among partners is a real challenge but blockchain could be very useful in this regard. In cross-border trade, mutual trust must be established between importers and exporters. For the importer, the risks are that the products are faulty or not as specified.

The exporter, on the other hand, faces the risks of non-payment, late payment or short-payment. Building trust within Africa’s cross-border free trade is essential and blockchain ledger can become a “guarantor of trust”, ultimately reducing costs for all parties.

With blockchain, there’s no need for traditional guarantors or escrow services. Importers and exporters can seamlessly connect and exchange information using a secure platform powered by blockchain for enhanced integrity.

Essential information such as dispatch, shipping details, fees payments, customs declarations, transit locations, and final delivery are all recorded on the platform to enhance transparency and trust. Traders can, therefore, have peace of mind when dealing with clients from distant countries, as is the case with the intra-African trade.

Blockchain-driven free trade

Infrastructure logjams and bureaucracy are critical challenges that Africa’s free trade agreement will face. Moving a container from one country to another involves countless customs stamps, customs signatures, and certificates.

To enable easier trade between countries, logjams associated with customs must be reduced so that containers can move freely from one country to another. A blockchain-driven trade can help streamline the shipping process and bring a higher level of efficiency to the trade.  It also eliminates costly intermediaries in the value chain, allowing buyers and sellers to interact directly with each other.

Besides, a platform like that allows customs authorities and agencies to simplify their oversight role by facilitating inter-agency collaboration. Moreover, onboarding regulators provide a legal framework for the system and greater assurance for the trading parties. For example, customs officials could verify the physical shipment items and enter the results into the secure ledger. This information is then made available to the importer and the exporter in real-time.

Digitization of trade

Harmonizing regulations is extremely important for intra-Africa trade as this ensures a quick and easier flow of goods and services across the continent. One effective way to achieve standardisation of regulations is through the digitization of trade activities and processes.

Many companies in Africa incur various hidden costs due to the use of outdated, flawed, and manual operational processes. A common example of these inefficiencies is the use of paper-based processes which can lead to information manipulation, data error or data loss.

Blockchain not only replaces inefficient paper-based processes but also streamlines workflows which rely on emails, fax, and other existing tools. The disruptive technology enables digitization of documentation processes, helping to save shipment time, enhance transparency, and reduce costs for all parties involved.

A 2019 report on Economic Development in Africa notes that Sub-Saharan Africa has the highest cost to export compared with all other regions and the highest cost to import with the exceptions of Latin America and the Caribbean based on border compliance, and South Asia.

Africa’s free trade could greatly benefit from digitizing critical trade activities on the blockchain. As we have seen with many global carriers and port operators, digitization of trade data helps to streamline the shipping process and bring a higher level of efficiency to the industry.

Final thoughts

There’s little doubt that Africa, being the key driver of the fourth industrial revolution, should be the region that experiences the most impact of the blockchain revolution. Introducing blockchain to the Africa free trade agreement would be a massive boost to the continent’s economic growth.

In order to obtain a considerable value that blockchain can bring to AfCFTA, the system needs to be robust to the requirements of global value chains. It would also have to deal with and overcome data privacy and security concerns. Thus, the system would need to be developed by the African Union and other stakeholders involved in the trade.

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About the author

Vincent Olago

Vincent Olago

Vincent Olago is the Managing Editor of Ledger Africa and has been active in the blockchain space for three years now. He's passionate about entrepreneurship and the potential of disruptive blockchain technologies to reshape our world. He supports startups to tackle blockchain challenges, address strategic problems and optimize growth.