Preferential Trade agreement, free trade areas, customs union, once well planned under the African Continental Free Trade Area (AFCFTA pact), benefits outweigh protectionism by far. AFCFTA member countries will have few or no price controls in form of tariffs or quotas between each other. This agreement like many around the globe, allow member countries to focus on their competitive advantages and to produce the goods and services they are comparatively more efficient at making, thus increasing the efficiency and profitability of each country.
Competitive advantages are conditions that allow a company or country to produce a good or service of equal value at a lower price or in a more desirable fashion. Business players will need to vigorously monitor their position to compete. A local company must look for conditions that allow production of goods and services that will generate more sales or superior margins compared to its market rivals. Competitive advantages are attributed to a variety of factors including cost structure, branding, and the quality of product offering, the distribution network, intellectual property and customer service.
The two major competitive advantages are comparative advantages and differential advantages. Under comparative advantages, firms produce a good or service more efficiently than its competitors, which leads to greater profit margins, thus creates a comparative advantage. Therefore, the more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantages. Remember rational consumers will chose the cheaper of any two perfect substitutes offered.
More dynamic business climate is expected since businesses will have free movement among member states, hence create competition. During the protection regime, industries are dormant and stagnant and may not be able to compete on global markets.
When protection is removed, they have the motivation to become true global competitors since firms will strive to be different or produce at low cost so is comparative and differential. This will be a good lesson for Rwanda’s business players mainly small business entrants, in terms of innovation, and do away with the usual copy and paste of businesses. Only constructive minds will survive competition! Investors will eventually have access to the global value chain and enjoy its advantages.
Foreign direct investment (FDI)
With no doubt, Economies will open doors for Investors within member states. Advantages are too numerous to ignore. Among many advantages, FDI adds capital to expand local industries and boost domestic businesses, creates jobs, contribute to corporate social responsibility, boost productions for exports thus balance of payments equilibrium... A very important aspect, FDI brings in foreign currencies to many formerly isolated economies, which is both brotherly and economical stance for Africanism.
Foreign companies may have expertise that domestic companies do not have to develop local resources. That’s especially true in mining, oil drilling, and manufacturing. Free trade agreements allow the foreign firms access to these business opportunities. When the multi-nationals partner with local firms to develop the resources, they train them on the best practices. That gives local firms access to these new methods of production.
The urge to compete for investors among member states, will engineer nations to plan for important infrastructures thus attracting investors in their economy.
Local companies also receive access to the latest technologies from their multinational partners. As local economies grow, so do job opportunities. Multi-national companies provide job training to local employees.
Concluding on this topic, trade protectionism is unlikely to be the answer to Rwanda and generally to Africa’s social-economic transformation. However, regulations within the agreements may protect against the disadvantages that are likely to occur in the free trade agreements. Environmental safeguards can prevent destruction of natural resources and cultures. Labor laws prevent poor working conditions. Laws to protect patent rights need to be agreed upon…
High tariffs only protect domestic industries in the short term. But, in the long term, global corporations will hire the cheapest workers wherever they are in the world to make higher profits.
Together, it is profitable for African countries join hands in the AFCFTA that will smooth in the participation of the global value chain and ease of access to global markets.
Thanks to the African Governments for signing the AFCFTA pact; as more advantages are awaited.