Reducing Trade Costs in East Africa: Deep Regional Integration and Multilateral Action

Evidence is now substantial that with the progressive global decline in tariffs over several decades, trade costs are a much more substantial barrier to trade than tariffs. Moreover, trade costs are especially high in sub-Saharan Africa compared to other regions in the world. We decompose trade costs into three categories: costs that can be lowered by trade facilitation; nontariff barriers; and the costs of business services. We develop a ten region, 18 sector global trade model that includes Kenya, Tanzania, Uganda and Rwanda of the East African Customs Union (EACU). We assess the aggregate impact of the reduction of all three types of trade costs as well as the reduction of each of the barriers separately to assess the relative importance of each. We assess “deep integration” initiatives within EACU to reduce these barriers to trade and how much more there is to gain if the trade cost reduction initiatives could be extended multilaterally or to a wider regional grouping, namely the proposed Tripartite Free Trade Area among EACU, COMESA and SADC. In the cases of Kenya and Tanzania, we also assess the impact of liberalization of non-discriminatory barriers against investors in services, i.e., barriers that affect home investors equally with foreign. We find that deep integration (the removal of the barriers within EACU) results in significant gains for our four EACU countries, especially from improved trade facilitation. Extending the lowering of non-tariff barriers and services liberalization multilaterally would increase the gains between two and seven times, depending on the EACU member country. We also find that reducing non-discriminatory services barriers that equally raise the costs of domestic and foreign providers of services in Kenya and Tanzania would increase welfare even more than multilateral reduction of discriminatory services barriers. Our results show that the adjustment costs of regional trade preferences are considerably smaller than with multilateral liberalization. Despite the fact that the evidence shows that the adjustment costs of trade liberalization are dramatically smaller than the welfare gains, lobbying interests are much stronger among those who anticipate a negative adjustment. Thus, our results show why there can be a political economy appeal to regionalism, despite the larger net gains of multilateral reform. This paper is innovative both conceptually and empirically. It contains foreign direct investment in services and is the first paper to numerically assess liberalization of barriers against both domestic and multinational service providers in a multi-sector, multi-region applied general equilibrium model. For this paper, the authors developed or employed new databases of the ad valorem equivalents of barriers in services and of the time in trade costs Both databases are shown to be important to the results.