The importance of services for the African Continental Free Trade Area: An academic perspective: Businesses that are responsive to regulation, low skill-intensive and can show stable income stand to reap significant trade gains.

• Author: Gamanya, Anesu

The services sector currently constitutes a significant percentage of the world economy Research shows that the top three sectors that received foreign direct investment (FDI) were software and IT services, business services and real estate. (1) In sub-Saharan Africa, trade in services account for nearly half of gross domestic product (GDP) and 10% of trade. (2) For countries such as Mauritius, the services sector is the largest contributor to GDP, contributing almost three-quarters of its economic output. (3)

There is also evidence of FDI concentrating mostly in services on the continent as a whole. South African FDI on the continent, for example, has largely focused on services, key among them being banking and financial services. (4,5) The facts show that Africa is moving fast towards trade in services and the African Continental Free Trade Area (AfCFTA) is an opportunity to increase intra-African trade in services for continental gains.

These opportunities can be made possible by first taking a keen look at how those gains can be achieved. Addressing non-tariff measures (NTMs) is critical to unlocking the full potential of intra-African services trade. Service enterprises that are highly responsive to regulation, income inelastic and low-skill intensive will experience significant trade gains for three reasons. (6)

First, services highly responsive to regulation can benefit from trade by reducing regulation without the need for financial investment. Second, income-inelastic services will benefit from economies of scale as demand is not largely affected by changes in income. Third, many African countries are abundant in low-skill labour, allowing services that are low-skill intensive to scale up their operations more quickly.

Selecting four services out of five (transport, communication, financial services, and business services) for the AfCFTA initial round of negotiations (7), research has shown that transport and business services would experience the largest trade gains compared to financial and communication services.

The finding is a result of simulated trade projections between 2020 and 2065 using the ad valorem Services Trade Restrictiveness Index (STR1). (8) Those STRls were calculated as estimated tariff equivalents of services NTMs based on a country's services regulatory framework. Each services sector is lowered to the lowest ad valorem STR1 in the world. The STRI is measured as a percentage of the price for each of the...