The Africa Continental Free Trade Area, AfCFTA is widely seen as a crucial driver for economic growth, industrialization and sustainable development in Africa .The AfCFTA will be an opportunity for Tanzania as a less developing country in Africa to confront the significant trade and current economic development challenges such as; market fragmentation, smallness of national economy, over reliance on the export of primary commodities, narrow export base, caused by shallow manufacturing capacity, lack of export specialization, under-developed industrial regional value chains and high regulatory and tariff barriers to intra-Africa trade amongst others.
AfCFTA lowers trade costs and allows consumers to access a greater variety of products at lower prices though Trade liberalization. Lower costs for imported raw materials and intermediate inputs increases competitiveness of downstream producers and promotes the generation of regional value chains. Trade liberalization also allows firms to access a large continental market and gain from economies of scale. In the long run, increased competitive pressures may improve firm efficiency. However, market consolidation may arise when smaller firms are exposed to stiffer competition.
Adjustment costs also depend on the modalities of tariff reductions. The types of tariff reduction modalities can be distinguished as follows;
Linear tariff cuts: In this modality, all tariffs are gradually reduced by equal shares every year until full elimination. Linear tariff reduction has the advantage that the phase-in does not further distort the efficient allocation of factors and resources. The homogenous tariff reductions across all sectors may ensure that factors efficiently move in the direction of the final equilibrium. However, this approach takes away the countries' flexibility to postpone adjustment costs in sensitive sectors and to prepare these sectors for increased competitive pressures. Example; In AfCFTA 90% of tariff lines to be liberalized in a linear form over a period of 5 years for Non LDCs and 10 years for LDCs (Least developed countries)
Progressive tariff cuts: This modality divides products into different groups that are liberalized at different speeds. This approach allows member States to eliminate tariffs for different sectors with more flexibility. There is a risk that the immediate increase of competition in non-sensitive sectors may lead factors to move towards still protected sensitive sectors. However, when also the sensitive sectors finally liberalize, those additional production factors may have to move once again. These temporary false incentives may increase overall adjustment costs. However, this approach provides more policy space with respect to defensive interests and allows countries to manage liberalization in their preferred ways. In AfCFTA , for Sensitive products of up to 7% of tariff lines, will be fully liberalized over 13 years for LDCs and 10 years for non-LDCs
Tanzania would benefit from the modality of tariff reduction of the AfCFTA that enhance trade liberalization. As trade liberalization comprises removing barriers on imports such as tariffs and quotas.
The country will be able specialise in the production of goods in which they have a comparative advantage vis-a-vis it's trade partners. Specialization often raises output as the process allows better and more efficient use of productive resources in economies.
AfCFTA would reduce the import prices and thus consumer prices. Trade can also allow consumers to access a greater variety of products in domestic markets. Due to these two effects, trade liberalization may lead to welfare gains in the form of consumer surpluses in importing countries. Lower import prices may also reduce costs of imported raw materials and intermediate inputs for downstream producers in the importing countries. The cuts in production costs therefore increase competitiveness of domestic producers and allow countries to integrate into global value chains.
Trade liberalization through AfCFTA allows domestic firms to access to bigger markets and gain from economies of scale. Once the small local market constraints are lifted, trade may not only allow firms to grow faster but also to have better access to finance and technology in the world economy. These benefits may also bring challenges to countries. Large firms that are taking advantage of economies of scale may gain dominant position in markets at the expense of SMEs. Market consolidation may arise when SMEs are exposed to stiffer competition during the transition. Thus, in order to ensure a smooth transition during trade liberalization, complementary policies such as consumer protection and competition policies need to be put in place.
In the long run, AfCFTA will lead to increased competition due to trade liberalizations may also lead to improved efficiency of domestic firms. Competitive pressures require firms to better use their resources, implement new technologies and innovate in order to survive under the new conditions. In some cases, trade liberalization may lead to structural transformation. trade liberalization may improve skill and technology content of developing countries' exports. While medium and high technology manufactures account for 25.4 per cent of intra-African trade, they only account for 14.1 per cent of African countries' exports to developed countries. Similarly, according to UNCTAD (2011), intra-African trade has relatively higher industrial content than African countries’ trade with the rest of the world.
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