Free Trade Can Reduce Inflation For Consumer Products

Introduction

Following the decision to reduce fuel subsidies in 2023, inflation rose in 2023 and is set to rise further in 2024. In 2023, inflation averaged 6.3% and is forecast to reach 7 – 7.5% this year. This is higher than the CEMAC threshold of 3% inflation, which is designed to ensure governments and central banks work towards limiting the increase in the price of goods and services. The decision to increase the price of Gasoline and Diesel will increase the cost of production for most companies, leading to higher prices for food, services, and consumer products.

In this article, we illustrate why the government should leverage free trade agreements to ensure that prices rise gradually. When prices rose initially, the Cameroon Economic Policy Institute (CEPI) called for the government to suspend import duties on vital products such as rice and pasta to support domestic consumption and the time needed for consumers to adjust to higher prices. While the government suspended import duties on a shipment of rice from Indonesia.

Cameroon has signed and legislated for the adoption of the African Continental Free Trade Area (AfCFTA) and has submitted its tariff schedules. However, implementation of the AfCFTA is not up to governments but businesses. So, the private sector must take a more proactive approach towards importing under the AfCFTA rules and the Guided Trade Initiative (GTI). There are benefits to promoting free trade as a tool to lower the price of goods and services.

Competition will Cause the Prices of Local Products to Adapt: Free trade increases access to products from other countries, such as rice, pasta, detergent, etc. When products from other countries enter the Cameroon market, this increases competition for companies that sell similar products. When this happens, businesses tend to engage in “price competition,” causing the prices of goods and services to fall. Suppose flour from France, wheat from Ukraine, beauty products from the United Arab Emirates (UAE), and orange juice from Germany must compete with local firms. In that case, consumers will benefit from lower prices.

Under the AfCFTA, businesses have a unique opportunity to access new markets, causing them to lower their prices to sell more goods. At present, Cameroon has received only one shipment of tea under the AfCFTA; more businesses, import companies, and traders should import under the AfCFTA and ensure that zero tariffs are reflected in domestic prices.

Free Trade will Reduce the Cost of Inputs: Cameroon imports intermediate products such as packaging material from African countries (16% of total trade) and machinery from more advanced countries. For example, the packaging used by some companies in Cameroon is produced with inputs and machinery from countries like India, the United States (U.S.), and China. Import duties for machinery have been suspended in the 2024 budget in an attempt to support business innovation and competitiveness. This openness to trade should extend to other sectors, as free trade will cause innovation to flow from other countries into the Cameroonian economy. China innovated much quicker by learning and copying from U.S. companies; Cameroonian companies should hope to do the same.

“Free Trade will Encourage Competition and Innovation because when more companies face competition from abroad, they must adapt and improve their products by innovating and finding more efficient ways to compete against foreign competition. This means better quality products at low prices for consumers”

Cameroon’s Trade with Other Countries

Cameroon’s trade balance is structurally negative. According to WTO data, in 2022 Cameroon imported USD $7.8 billion worth of goods against USD $5.9 billion in 2021. In 2022, the five main clients of Cameroon accounted for 62% of the country’s total exports and included the Netherlands (26.8%), India (14.2%), France (9.9%), Spain (8.5%), and Italy (6%). As per imports, the main suppliers were China (15.8%), India (10.8%), France (8.2%), the Netherlands (3.6%), and South Korea (3.5%).

Rather than engage in unilateral measures to prevent exports, local businesses and special interests should focus on innovating and upskilling entrepreneurs to become increasingly competitive. After all, while there are plenty of talented Cameroonians, we won’t be producing cars and industrial machinery this year. Rather than view the current account deficit as the result of free trade with other countries, we should see it as a symptom of low levels of industrialization. Acknowledging this will enable a rethink of investments that will improve business sector competitiveness. As such, free trade should instead be viewed as an opportunity to address rising prices and mitigate the cost-of-living crisis that has culminated in inflation averaging over 7.8% in 2023.

Free Trade will encourage Innovation and Cheaper forms of Value Creation: When companies import machinery from abroad, it allows them to produce more effectively. Cameroon cannot produce all the necessary machines, nor should it try to. When Cameroonian companies import new machinery, it allows them to produce more effectively and innovate their methods of production. Free trade will lead to cheaper and more innovative methods of production, which will cause the prices of basic goods like detergent, flour, and water to fall further. This will benefit consumers and improve the standards of living for consumers across Cameroon.

The average tariff in Cameroon ranged from 14% – 65% and while some tariffs are designed to support local industry, they should not be abused to reinforce the need for autarky and self-sufficiency. We can support and promote locally made products via the “Made in Cameroon” initiative; however, this does not stand in conflict with promoting free trade. There is no reason why consuming local flour should prevent us from consuming British Quaker oats or Saudi cereals. Free trade can be a win-win for the government, the private sector, and Cameroonian citizens.

“Imports Do not signal the decline in support of local industry, but rather the need to complement local demand for goods and services that we cannot produce or may be too expensive to produce over the medium term.”

What Can We Learn from the World?

While the United States (U.S.) and China are locked in a trade war and impose unilateral tariffs against each other, consumers are bearing the brunt via higher prices. Ian Bremmer, a political scientist at G-Zero Media, argued that lowering tariffs will bring down inflation, and failing to do so partly explains why U.S. inflation has been higher. As the U.S. switches production to Mexico, the benefits of nearshoring are not yet felt in local inflation outcomes. So, trade barriers only increase the cost of goods, not the reverse.

Free Trade Will Lower Inflation and Improve Standards of Living

Free trade agreements (FTAs) have been found to have a significant negative effect on domestic inflation rates. Studies have shown that the expansion of FTAs leads to a reduction in Consumer Price Index inflation, especially in countries with a low level of openness. Cameroon should seize the opportunity in Free Trade to lower the prices of goods and services and reduce the implications of higher fuel prices on consumer disposable incomes.

Henri Kouam – Economist & Executive Director

Hawaing Djamo – National Coridnator