African free trade zone established.

26 African countries came together to form a free trade zone between them, including all of the southern and western areas of the continent. A free trade zone is characterized as an agreement between specific countries to remove any existing trade barriers regarding goods, services and capital, and yet be able to keep individual protectionist measures against goods coming from countries which are not a part of the FTA.

Why did the nations decide to do it? According to the leaders behind the decision, this FTA is aimed at countering the economic downturn as well as creating stronger bargaining power at the world stage with regards to for example trade. Also, African leaders want to engage in joint infrastructure projects, spread across the area of the FTA, and aim to stimulate the economic growth of Africa as a continent, in economically difficult times.

The agreement itself, is a collaboration of 3 already existing FTAs: Southern African Development Community (SADC), the East African Community (EAC) and the Common Market for Eastern and Southern Africa (Comesa). Another reason why all three groups decided to merge would be the fact that some countries were a part of more than 1 of these organizations.

The question is, can this large FTA successfully fight the negative downturn of the global economy? In short, it depends. As stated above, a FTA allows for free movement of goods, services and capital. This means that there is now a large group of countries, which can trade with each other freely, while keeping their own tariffs on other countries unchanged. Entering a free trade zone, would not hinder the trade balance with countries outside of the FTA, as the protectionist measures adopted by the country can remain unchanged towards these nations. There is however a large chance that by entering the zone, countries can experience higher level of exports as well as imports as well as possibly higher levels of consumer spending, eventually even investment leading to overall growth in the economies. This is developed below.

An free trade zone between African countries could lead to trade creation more so than trade diversion. The reason for this is that African nations may be able to produce something at a lower opportunity costs than other nations, however they were blocked by other countries using quotas, tariffs or subsidies. With the introduction of the trade agreement, such protectionist measures disappear, allowing countries to specialize and export products with comparative advantage in production, and import all other products. Specialization, as well as importing cheaper products from more efficient producers (this is called trade creation) would possibly lead to a fall in prices, which would provide an incentive for consumers to spend, which would increase AD, leading to economic growth. This can be especially valid since the vast majority of population in Africa is poor, which makes their marginal propensity to consume high.

There is a problem with this as well though. Considering how low incomes of majority of African people are, can consumption really increase that much? Moreover, will the imported goods actually end up being a lot cheaper (if at all) considering how bad the transporting of goods is in Africa due to lack of proper infrastructure? Maybe the transportation costs of transporting goods from Libya to Mozambique are just to high to export? All of these questions are valid concerns as to the potential increase in economic growth due to the creation of the free trade zone.

The leaders of African countries are aware of the fact that poor infrastructure is a barrier to development, and to economic growth, especially for countries with export led growth. The idea to create international infrastructure systems from airports and docks, to roads and railways. This would provide a good basis for improving export led growth, but the action in itself is a display of large government spending, which could lead to an increase in AD.

The FTA will not harm the countries joining. It may provide the stimulus necessary for countries to battle the global recession, however it is not a guarantee. It is however a strong move in terms of unity and seeking greater recognition and awareness at the world stage.