Impact of Regional Trade Agreements on Economic Growth: An Econometric Analysis

While general trade theory points towards the stylised hypothesis of a positive correlation between trade openness and economic growth, theorists such as Jacob Viner questioned this hypothesis due to the presence of trade creation and diversion effects. Africa has been historically engaged in various regional trade agreements (RTAs) whose economic gains are sometimes skewed leading to polarisation of gains (or losses) and uneven development. Will the African Continental Free Trade Agreement (AfCFTA) lead to any significant welfare gains? Using the augmented gravity model, this chapter seeks to answer this and related questions by focusing on three regional economic communities (RECs), namely, the East African Community (EAC), Common Market for East and Southern Africa (COMESA), and Southern African Development Community (SADC). The gravity model was preferred not only for its ability to identify significant factors which influence bilateral trade but also for its ability to reflect the level of trade creation and diversion and key components in welfare distribution. The results indicate that economic size (positive) and distance (negative) are significant in influencing bilateral trade, but population size was not showing that it is income which carries more weight in trade volume. Country idiosyncratic factors of the shared border and landlocked or coastal were also significant, but the presence of a common language was not. The chapter recommends not only the removal of trade barriers but also the introduction of one-stop border posts, the adoption of a common language, and the development of soft and hard infrastructure and other non-trade barriers (NTBs).