Trade Effects of the East African Community Customs Union: Hype Versus Reality

• Author: Steven Buigut
• Date: 01 September 2016
• Published date: 01 September 2016
• DOI: http://doi.org/10.1111/saje.12133

TRADE EFFECTS OF THE EAST AFRICAN COMMUNITY

CUSTOMS UNION: HYPE VERSUS REALITY

STEVEN BUIGUT*

Abstract

This study uses a theoretically consistent gravity model to assess the average trade effect of the

East African Community customs union implemented in 2005. The estimation is carried out

using a framework that controls for endogeneity. Country-pair f‌ixed effects are included to con-

trol for time constant factors while importer-year and exporter-year f‌ixed effects account for time

varying multilateral resistance variables. To check for robustness a Poisson pseudo-maximum like-

lihood estimation is used. The study covers the period 2000 to 2013 with a total of forty nine

trading partners. The results suggest that the EAC customs union has produced a moderate posi-

tive effect on intra-EAC trade of about 22.1%.

JEL Classif‌ication: F130, F140, F150

Keywords: East African Community, trade effect, regional integration, customs union, gravity model

1. THE EAST AFRICAN COMMUNIT Y – AFRICAN ECONOMIC COMMUNITY

NEXUS

A primary objective of the African Economic Community (AEC) Treaty of 1994 is to

promote the integration of African economies among other things. This is to be achieved

by coordination, harmonisation and progressive integration of activities of existing and

future Regional Economic Communities (RECs) in Africa. Of the RECs currently in

existence across Africa,

1

the main ones in the Eastern and Southern Africa region recog-

nised as the core building blocs of the AEC are the Common Market for Eastern and

Southern Africa (COMESA), the Southern Africa Development Community (SADC),

and the East African Community (EAC). COMESA

2

currently has 19 member coun-

tries, the SADC

3

has 15 members and the EAC

4

has f‌ive members.

Efforts to deepen regional integration within these blocs therefore ties in with the key

objective of the AEC. However, fostering deeper integration has been a challenge mainly

* Corresponding author: Professor, School of Business, American University in Dubai, Box

28282, Dubai, UAE. E-mail: sbuigut@aud.edu

1

These are AMU (Arab Maghreb Union), ECCAS (Economic Community of Central African

States), COMESA (Common Market of Eastern and Southern Africa), EAC (East African Com-

munity), SADC (Southern African Development Community), IGAD (Intergovernmental

Authority for Development), and ECOWAS (Economic Community of WestAfrican States), and

CEN-SAD (Community of Sahel Sahara States).

2

The current members are Burundi, Comoros, D. R. Congo, Djibouti, Egypt, Eritrea, Ethiopia,

Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda,

Zambia, and Zimbabwe.

3

Angola, Botswana, D. R. Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique,

Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe.

4

Burundi, Kenya, Rwanda, Tanzaniaand Uganda.

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South African Journal of Economics Vol. 84:3 September 2016

South African Journal

of Economics

due to overlapping memberships, coupled with the disparate pace of integration among

the regional blocs. Buigut (2006) observes that one of the major stumbling blocks to a

deeper integration in the Eastern and Southern Africa region is the overlap in member-

ship. For example, four of the EAC member states (Kenya, Uganda, Rwanda and Bur-

undi) are also members of COMESA and one member state (Tanzania) is a member of

SADC. Eight countries are members of both the SADC and COMESA.

5

Therefore, of

the twenty-six countries that constitute the combined membership of COMESA, EAC

and SADC, thirteen of them belong to more than one regional bloc. In an attempt to

harmonise membership, the Heads of State and Government of COMESA, the EAC

and the SADC (COMESA-EAC-SADC Tripartite) in June 2011 launched negotiations

for the establishment of an integrated REC (EAC, 2011).

This study focuses on the EAC. Our interest in this bloc is motivated by the dynamism

the EAC has exhibited. In contrast to the other RECs in the region, the EAC has been

very active over the last two decades. The EAC integration effort started with the signing

of the “Agreement for the Establishment of the Permanent Tripartite Commission for

East African Co-operation” by three East African countries namely Kenya, Uganda and

Tanzania in 1993. Following this agreement, the “Treaty for Establishment of the East

African Community” was signed in November, 1999. The treaty came into force July

2000. The community then negotiated and signed a customs union treaty in 2004 that

provided for a f‌ive-year alignment period. The customs union came into force in 2005.

The asymmetric internal tariff elimination agreed upon granted Ugandan and Tanza-

nian goods into Kenya immediate duty free status. Goods f‌lowing between Uganda and

Tanzania and some Kenyan goods (category A) into Uganda and Tanzania also achieved

duty free status immediately. However the internal tariff on some Kenyan goods (cate-

gory B) to Uganda and Tanzania was to be phased out gradually from 10% to 0% over

the 5-year period. Rwanda and Burundi joined the EAC in July 2007 bringing the EAC

membership to f‌ive. Continuing with their effort to deepen integration, the EAC mem-

bers have signed a common market protocol in 2009. The operationalisation of the com-

mon market commenced in July 2010. Furthermore, there are plans for a monetary

union. A protocol for the establishment of an East African Monetary Union was signed

in November 2013. The protocol provides a road map for the realisation of a single cur-

rency in 2024. Admittedly, the EAC customs union is relatively young. Still this is a

good point in its life to take stock of its impact. However, to our knowledge, there are

currently no studies that focus on estimating the average trade effect of EAC customs

union on its members. It is this gap that the present paper attempts to f‌ill.

The objective of the present study, therefore, is to estimate the average effect of the

EAC customs union. Specif‌ically, it analyses the customs union effect on intra-regional

trade (trade creation) and on nonmembers (trade diversion). The estimation is carried out

using a theoretically founded panel gravity model. We adopt an empirical approach that

explicitly accounts for multilateral resistance variables and therefore accounts for the endo-

geneityproblem.Further,wehaveestimateda Poisson pseudo-maximum likelihood (Pois-

son PML) for robustness check. A key result obtained is that the EAC customs union has

signif‌icantly increased the EAC intra-bloc trade by about 20.9%. Policy wise this is an

5

These are D. R. Congo, Madagascar, Malawi, Mauritius, Seychelles, Swaziland, Zambia, and

Zimbabwe.

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