An assessment of trade effects of East African Community customs union on agricultural trade
This thesis investigates the trade effects of East African Community Customs Union (EACCU) on agricultural trade, focusing on four of a number of products classified as sensitive by the EAC CU, namely, maize, rice, sugar and wheat. Secondary data on EAC member countries’ imports, gross domestic product (GDP), population and purchasing power parity (PPP) of both importing and exporting countries covering 2005 and 2011 as well as data on distance between major cities in trading countries and borders between countries were obtained from different sources. A single commodity gravity model was estimated using Ordinary Least Squares (OLS). The objective was to examine the determinants of import flows of those products in the region as well as the trade effects of the EAC Customs Union on their trade. The relevance of the intra-EAC trade in the total EAC import was also analyzed using descriptive statistics. The results show that the intra-EAC import in those products represented very small proportions of the region‟s total import. Those proportions were 0.5, 26, 3.4 and 5.5 percent on average for wheat, maize, sugar and rice respectively. Further, the gravity model showed that GDP, population, PPP, distance, common border and membership in EAC were important determinants of import flows in the region but the magnitude and signs of their coefficients as well as their level of significance were product and period specific. The coefficient for EACM (import of member from non-member) for both wheat and rice was negative and statistically significant (-6.255 in 2009-2011 for wheat,-7.391 in 2005-2011 and -5.20 in 2009-2011 for rice), suggesting that the EAC CU had gross trade diverting effects on both products. It was positive and statistically significant for sugar in the first period (3.341 in 2005-2008) suggesting that sugar from outside of the region was more preferred to the one produced in the EAC. With its CET set at 100 percent, the results suggest that the EAC does not have a competitive advantage on sugar production, hence consumer continue to pay high prices on both domestically produced and imported sugar. With regard to maize, the results suggest that the EAC CU had no trade effect on its trade for the coefficient for EACM for maize was not statistically significant in the two periods. The study recommends that the EAC as a bloc and individual member countries should promote policies that aim at eliminating physical and other non-tariff barriers and hindrances to trade in the region. More specifically all the products under this study should be removed from the list of sensitive commodities for the region contributes relatively little in EAC imports and the relatively higher tariffs on their import makes them relatively more expensive in the region and divert trade for wheat and rice.