The African Continental Free Trade Agreement: Welfare Gains Estimates from a General Equilibrium Model

IMF Working Papers, June 7, 2019

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Canonical URL: The African Continental Free Trade Agreement: Welfare Gains Estimates from a General Equilibrium Model

Authors: Lisandro Abrego, Maria Alejandra Amado, Tunc Gursoy, Garth P. Nicholls, Hector Perez-Saiz
Published: June 7, 2019
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9781498314398.001

In March 2018, representatives of member countries of the African Union signed the African Continental Free Trade Area (AfCFTA) agreement.
The AfCFTA provides a framework for trade liberalization in goods and services and is expected to eventually cover all African countries.
The paper estimates welfare effects for 45 countries in Africa using a multi-country, multi-sector general equilibrium model based on Costinot and Rodriguez-Clare (2014).
Three different model specifications—comprising both perfect competition and monopolistic competition—are used.
Simulations include full elimination of import tariffs and partial but substantial reduction in non-tariff barriers (NTBs).

Model: Multi-country, multi-sector general equilibrium model grounded in Costinot and Rodriguez-Clare (2014).
Specifications: Three alternative model structures to capture differences between perfect competition and monopolistic competition.
Policy simulations: (a) full elimination of import tariffs, and (b) partial but substantial reduction in NTBs.

Results reveal significant potential welfare gains from trade liberalization in Africa.
Because intra-regional import tariffs in the continent are already low, the bulk of welfare gains come from lowering NTBs.
Overall gains for the continent are broadly similar under the three model specifications used.
There is considerable variation of potential welfare gains across countries in all model structures.

Policy focus should prioritize reducing non-tariff barriers given their large contribution to potential welfare gains.
Uniform continental tariff elimination alone is unlikely to be the main driver of welfare improvements because intra-regional import tariffs are already low.
Heterogeneity in country-level gains implies the need for country-specific implementation strategies and complementary policies to ensure equitable distribution of benefits.

Source: The African Continental Free Trade Agreement: Welfare Gains Estimates from a General Equilibrium Model (IMF Working Paper No. 2019/124).