Liberalization of Services and its Implications on Cross-Border Agricultural Trade in Eastern Africa

This study analyses the effects of services liberalization on cross-border trade in agricultural commodities within the East African Community (EAC). Cross-border trade flows in agricultural goods are examined as the agriculture sector still represents an important share of GDP in the EAC region. Trade supporting services are necessary in enhancing agricultural production as well as in marketing and distribution thereby ensuring food security. On average, the services sector presently accounts for about 48.8% of GDP and 34.5% share of total exports in the EAC region. The gravity model was used to establish the impact of trade in services on cross-border trade in maize, beans and rice in the EAC customs union. The rationale is that over and above removal of tariffs and other trade barriers, trade supporting services are an important component of transaction costs, hence influence patterns and volume of cross-border trade. Overall, the empirical results indicate that trade in services significantly influence cross-border agricultural trade in the EAC region. Specifically, an increase in trade in business, insurance and communications services increases cross-border agricultural trade. However, the impacts are insignificant in the case of financial services implying weaknesses in the entrenchment of financial institutions in rural agricultural activities and regulatory restrictions associated with provision of financial services. The study recommends removal of restrictions on services trade to complement the gains from liberalization of agricultural trade in the EAC region. This requires establishment of a regional framework agreement on services that would guide orderly removal of existing regulatory restrictions in the services sector taking into consideration the need to consolidate the envisaged gains of the EAC Common Market.