Publication - Working Paper
The Common External Tariff (CET) of the East African Community (EAC) is due for potential reform in November 2017. Manufacturers associations in the large EAC countries are pressing for additional tariff bands and greater protection, with the stated aim of promoting backward linkages and value chain development. This direction is dangerous in a dynamic sense, as it sets the stage for further cascading protectionism, as was seen in other countries following Import Substitution Industrialisation (ISI) policies in the 1970s and 1980s. This project therefore seeks to add some analytical weight to the ongoing CET discussions by looking for evidence that the CET itself has already had an impact on trade costs in EAC, or on export competitiveness. If the evidence for positive effects is weak, it suggests that it will not be productive to double down on existing policies, but instead alternative approaches should be tried.
Reducing trade costs, which drive a wedge between producer prices in an exporting country and consumer prices in an importing country, is crucial to spurring engagement with the international economy. Liberalisation of intra-regional trade within EAC through the elimination of customs duties should have (if successfully implemented) reduced trade costs, although substantial barriers may remain such as non-tariff measures and poor trade facilitation. This project will utilise the UNESCAP-World Bank trade costs database and undertake the following analysis:
For each of the above points, the project will examine the data for obvious breaks due to implementation of the CET, although the length of the sample may make it difficult to be definitive.
Furthermore, the project intends to provide evidence on the relationship between CET reforms and the export competitiveness of select value chains (e.g. leather, textiles). By decomposing observed trade growth into components coming from external demand, trade costs, and improvements in competitiveness—using an approach grounded in theory—we will analyse trends in EAC countries’ competitiveness from 2000 to 2015, relative to comparator countries. The index of RCA will be derived by: using BACI trade data to estimate a gravity model developed by Hanson (2010), which improves on the standard Balassa index by isolating exporter specific factors that can be understood (at a policy level) as export competitiveness. We will therefore analyse whether competitiveness in the EAC has been growing differently under the CET regime than it has before (which links back to the question of trade costs and NTMs). If EAC countries are found to lag significantly with respect to comparators in terms of their underlying competitiveness in these sectors, the focus should be on measures to enhance competitiveness and develop capacity, rather than measures to further insulate producers from world markets.