Abstract
The Common Market for Eastern and Southern Africa (COMESA) is a Free Trade Area (FTA) regional trade agreement in Africa. Currently, Ethiopia is negotiating to join COMESA FTA. This study assesses the impact of three regional trade arrangements, COMESA FTA, customs unions, and the European Partnership Agreement (EPA) on the economy of Ethiopia. The analysis is based on a static Global Trade Analysis Project (GTAP) model, version 9 database. Unlike previous studies, the customs union scenarios are designed at the detailed Harmonized System (HS) level. COMESA FTA (scenario 1) with standard GTAP model results in a welfare loss for Ethiopia due to negative terms of trade and investment-saving effect, but with unemployment closure (scenario 2); Ethiopia enjoys a welfare gain mainly due to endowment effect. In scenario 3 (COMESA customs union) and scenario 4 (European Partnership Agreement), Ethiopia loses due to negative terms of trade and investment-saving effect. There is a large increase in demand for unskilled labor force in Ethiopia by around US$23 million, US$112 million, and US$43 million for scenario 2, 3, and 4 respectively. Moreover, there is a positive output effect for oilseeds, leather, and basic metals across all scenarios. The world, as a whole, enjoys welfare gains with COMESA FTA (scenario 1 and 2). However, with scenario 3 and 4, there is an overall welfare loss. There is no strong reason for Ethiopia to move to the customs union, and the EPA in the short run. Therefore, a transition period is necessary, but it is recommended for Ethiopia to join COMESA FTA.
Highlights
Regional trade agreements (RTA) have proliferated around the world since the establishment of General Agreement on Trade and Tariffs (GATT)/ World Trade Organization (WTO), and almost all the members of the world trade organization are member of at least one RTA
The analysis shows that the trade creation effect of forming an Free Trade Areas (FTA) differs across the three RTAs depending on the depth of trade liberalization reforms undertaken
The results indicate that deep integration among the East African Community (EAC), Common Market for Eastern and Southern Africa (COMESA) and Southern African Development Community (SADC) regions results in significant gains in trade and welfare, but the estimated gains vary across countries and regions
Summary
Regional trade agreements (RTA) have proliferated around the world since the establishment of GATT/ WTO, and almost all the members of the world trade organization are member of at least one RTA. There is an increasing trend of RTA formation, and currently the cumulative notification of RTA in force reaches 471 while the number of physical RTA in force are 293.1 Fiorentino et al (2009) explain the current wave of RTA in four different but related ways. There is an increase in North–South RTA, a gradual replacement of the long established non-reciprocal system of preference, Amogne and Hagiwara Economic Structures (2021) 10:2 and an increasing number of south-south RTA. There are an increasing number of cross-regional trade agreements. There is a decreasing propensity for plurilateral RTA and a net increase in the number of bilateral RTA. Free Trade Areas (FTA) is more attractive to countries that are committed to comprehensive trade liberalization compared to customs union and partial scope agreements
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