Abstract
The paper investigates the potential impact of the EAC trade agreement (a south-south Regional grouping) on trade creation and diversion. The paper seeks to establish whether the EAC RTA has diverted or created trade using an expanded (augmented) gravity model. The paper departs from the conventional estimation approach that uses average combined trade flows as the dependent variable which is prone to errors and uses exports. We estimate static and dynamic random effects models using a panel data set from 2001 to 2011 on seventy countries that trade mainly with the EAC partner states. Results suggest that indeed the implementation of the EAC treaty has created trade contrary to widely held views that South-South RTAs largely divert trade. There is thus evidence that the EAC, a south-south RTA has been a more trade creating than trade diverting as espoused in the literature.
Highlights
In the last two decades international trade has experienced dramatic increase in Regional Trade Agreements (RTAs)
The salient features of the East African Community (EAC) Treaty are articulated in Article 5 (2), which provide for the establishment of a Customs Union (CU) to be followed by a Common Market (CM), a Monetary Union and a Political Federation
Following the implementation of the EAC CU in 2005 the value of intra-EAC trade steadily increased and more than doubled from US$1.8 billion in 2004 to US$5.5 billion in 2012. This is reflected in the share in total EAC trade which improved from 7.8 percent to 11.4 percent (WTO, 2012), significant differences exist with respect to specific member states
Summary
In the last two decades international trade has experienced dramatic increase in Regional Trade Agreements (RTAs). Trade liberalization has been an important part of East Africa’s policy agenda since the countries embarked on liberalising their inter-state trade as part of the regional integration process. This is exemplified by the number of trade initiatives, economic integration agreements that the region is involved in, such as the East African Community (EAC), the Common Market for East and Southern Africa (COMESA) and South African Development Corporation (SADC) for Tanzania. On the other hand Cernat (2006) argues that, South-South RTAs are not more trade diverting than other RTAs implying that it is case by case This view is supported by Elbadawi (1997) who argues that integration in Africa is key to generating the threshold that can trigger the needed growth through complementarities. The paper seeks to establish whether the EAC RTA has diverted or created trade
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