With Brexit and the recent shift toward protectionism in U.S. politics, free trade and in particular regional trade agreements are under attack in prominent contexts. Globalisation, in terms of lowered barriers to trade, has been much studied by economists--both in terms of the aggregate welfare impacts and income distribution. In contrast, the study of preferential trade agreements (PTAs) which are both trade-restrictive and trade-liberalising is more recent in its growth. PTAs, which are occasionally regional and hence often labelled regional trade agreements (RTAs) have proliferated in practice in the past three decades. As a young literature, a number of research questions remain open regarding PTAs. For example, the "PTA puzzle" describes the fact that within PTAs, trade increases by much more than can be explained by the reductions in tariffs accompanying the PTAs. However, most studies are either at an aggregate level, and just measure a single net impact of the PTA, or conversely examine tariff change impacts under the PTAs, without examining the overall impact. PTAs have been expanding and deepening in Africa, including the East African Community (EAC), and this paper will explore these questions in the context of the EAC.
Forming the EAC has been the most significant economic policy that each of the four countries under investigation (Rwanda, Uganda, Kenya, and Tanzania) have undertaken in the past 10 years. Particularly as these countries move towards continental trade integration with negotiations toward the Continental Free Trade Area (CFTA), these countries deserve to better understand the impacts of the EAC. Some policy questions of interest include the following:
- Did the EAC result in an increase in trade, or did it merely shift trade from outside the EAC to within the EAC?
- For which industries and for which product lines in which EAC countries did it create trade, and for which did it shift trade?
- Does a less-industrialised country such as Rwanda need to be concerned about trade diversion, with imports from the world low-cost supplier of a good being replaced by imports from Tanzania or Kenya, as a result of the EAC's Common External Tariff (CET)?
- How did the EAC change employment within firms, or employment variability within firms?
Answering these questions will assist these countries as they consider moving toward broader continental trade liberalisation.
This study will use both industry-level trade data from all EAC countries, and firm-level trade data from Rwanda and Uganda to explore the aforementioned policy questions. The data also allow for the potential to examine the way in which trade costs and transport costs have changed at the level of the firm as a result of the EAC. The research will be very careful to be grounded in state-of-the-art industry-level trade models, and also state-of-the-art methods for identifying the causal effects of trade changes. The empirical estimation will be facilitated by the staggered membership of countries into the EAC, as well as the differential tariff changes that resulted from varying, overlapping membership across EAC countries in other (non-EAC) PTAs.