Markets
Senior 2 · Entrepreneurship
Markets
Lesson 4 of 4
22 min
On 21 March 2018, leaders from across Africa met in Kigali and signed the agreement that created the African Continental Free Trade Area (AfCFTA), which began trading on 1 January 2021. Rwanda is also a member of the East African Community (EAC) and of COMESA. For a small, landlocked country, these agreements turn a home market of about 13 million people into regional and continental markets many times larger. This lesson explains how that works.
Economic integration is the process by which countries agree to reduce or remove barriers to trade between them and to bring their economic policies closer together. A group of countries that does this is a trading bloc (or regional economic community).
Two kinds of barrier are removed:
| Stage | What member states agree |
|---|---|
| 1. Preferential trade area | Lower (but not zero) tariffs on some goods traded between members. |
| 2. Free trade area | No tariffs on goods traded between members; each member keeps its own tariffs on goods from outside. |
| 3. Customs union | A free trade area plus a common external tariff: the same tariff on goods from outside the bloc. |
| 4. Common market | A customs union plus free movement of labour, capital and services. |
| 5. Economic union | A common market plus shared economic policies. |
| 6. Monetary union | A single shared currency and central bank. |
| 7. Political federation | Complete integration into one state. |
This is an illustration by Ganzaa with simple round numbers, not real tariff rates. A Kigali shop can buy a mattress made in Kenya (an EAC member) for 90,000 Frw, or one made outside the EAC for 80,000 Frw before tax. Suppose the EAC’s common external tariff on mattresses is 25%.
The shop buys from Kenya. Trade inside the bloc grows and EAC factories gain customers. But notice what the bloc gave up: the cheapest producer in the world was outside, and the government collected no tariff.
| Advantages | Disadvantages |
|---|---|
| A much larger market for member firms, so they can produce more at a lower cost per unit. | Weak local firms may close when they face stronger competitors from bigger member economies. |
| Cheaper imports and more choice for consumers. | Governments lose tariff revenue on trade between members. |
| Free movement of workers and capital; more investment. | Benefits can be unequal: bigger, more industrial members may gain most. |
| Joint projects such as roads, railways and one-stop border posts. | Members give up some control over their own trade policy. |
| Closer cooperation and peace between neighbours. | Goods may come from a member rather than from a cheaper outside producer. |
Tip
Memory hook. Each stage adds one thing to the one before: lower tariffs → no tariffs → + common outside tariff → + free movement of people and money → + shared policies → + one currency → one country. If you can say what a stage adds, you can name it.
Solution: A common external tariff: every member charges the same tariff on goods from outside the bloc.
Solution: Monetary union. The EAC signed a protocol planning one in 2013.
Solution: Tariff = 0.10 × 150,000 = 15,000 Frw. Cost = 150,000 + 15,000 = 165,000 Frw.
Solution: Free movement of labour lets him look for work in other member states, and a larger market means more building projects to work on.
Summary
Sources and credits
The mattress illustration, the tables, the worked example and the practice items are written by Ganzaa.
This lesson adapts CC BY-SA material and is shared under CC BY-SA 4.0.
