Assessing the Intra-Arab Trade Integration and Potential: Evidence from Stochastic Frontier Gravity Model

Following the theoretical background on production theory, this study employs a stochastic frontier gravity model (SFGM) to investigate the intra-Arab trade performance and potential over the period 1998-2015. The trade performance against the maximum possible level of potential trade is measured by a stochastic frontier. The emphasis of this study is to detect the presence of ‘behind the border’ and ‘beyond the border’ constraints on trade flow among Arab countries, which have been neglected by previous studies. The empirical results indicate that ‘behind the border’ constraints are responsible for a considerable gap between potential and actual trade among Arab countries. That is to say these constraints obstruct realizing the full trade potential despite the fact that these countries have initiated many trade arrangements to promote intra-trade during the last five decades. The results also reveal that the influence of ‘behind the border’ constraints on trade flows between Arab countries have been decreasing over time. Moreover, the efficiency scores of intra-Arab trade indicate a relatively low degree of trade integration among Arab countries, confirming the existence of both ‘behind the border’ and ‘beyond the border’ rigidities against intra-Arab trade. Finally, the paper ends with some policy implications to remove these barriers as a necessary condition to realize trade potential among Arab states.