Regionalism and Multilateralism in Africa: An empirical perspective

Transcription

1 Sabbatical Leave Programme Regionalism and Multilateralism in Africa: An empirical perspective (First draft) Name of staff member: Bineswaree Bolaky Institution: United Nations Conference on Trade and Development /University of Geneva Academic supervisor s name and title: Professor Marcelo Olarreaga Dean, Geneva School of Economics and Management University of Geneva Date: 31 August 217 United Nations Sabbatical Leave Programme The views and recommendations expressed in this report are solely those of the original author and other contributors and do not necessarily reflect the official views of the United Nations, its agencies or its Member States. Textual material may be freely reproduced with proper citation as appropriate. 1

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3 Endorsement by academic supervisor This is to certify that this report is based on the research undertaken by Bineswaree Bolaky during the period of March 1 and July 3 rd 217 at the University of Geneva under my supervision. Signature: Name: Professor Marcelo Olarreaga Title: Dean, Geneva School of Economics and Management, University of Geneva Date: 31 August 217 3

4 Contents Table of Contents Abstract... 4 Introduction... 6 Body of the Report. 7 I. Regional integration and trade in Africa. A. Brief history of regional integration in Africa and its current challenges B. State of trade (exports and imports) within RECs II. The interface between regionalism and multilateralism in Africa: An empirical perspective. A. Brief literature review: Building blocs v/s Stumbling blocs debate B. Methodology of paper C. Description of data used and State of MFN and Preferential tariffs in RECs (i) Data (ii) MFN rates in Africa (iii) Minimum preferential rates in Africa D. Estimation results Conclusions and Recommendations 35 Appendix A: Estimation Results.39 Appendix B: a. MFN Rates Profiles of African countries 5 b. Data Availability per African country: MFN rates c. Data Availability per African country: Preferential rates References 4

5 Abstract The focus of this report is to study the interface between regionalism and multilateralism in Africa from an empirical perspective. The main idea is to investigate two key empirical questions: Whether Most Favored Nation (MFN) applied tariffs set by African countries exert an influence on the preferential tariffs that they impose on members of their own regional economic community (REC)? and; Whether preferential tariffs set by African countries on their REC members have an influence on MFN applied tariffs set for members outside their regional economic community? The purpose of the report is to shed light on whether external trade liberalization pressures affect the setting of preferential rates by African countries for its African trading partners (within their regional economic community), that is whether multilateralism is a building or stumbling bloc for regionalism in Africa. Similarly it sheds light on whether preferential rates set by African countries for their African REC partners influence the MFN rates granted by African countries to external trading partners, whether regionalism is a building or stumbling bloc for multilateralism in Africa. Answers to questions of this nature have policy implications for the regional integration process in Africa and can provide guidance to policy makers on the "right" sequencing and timing of tariff cuts in their trade policies. Based on a modeling approach borrowed in part from Estevadeordal, Freund and Ornelas (28), and using econometric methods of estimation, there is preliminary evidence to suggest that African countries respond to reductions in the MFN rate (that is to increased external liberalization), to increased non-tariff barriers to exports and to greater dependence on multilateral loans by increasing the preferential rate (decreasing the preference margins) of their REC trading partners. Multilateralism in this sense hurts regionalism. Greater dependence on multiltateral finance, that often comes with conditionalities also hurts regionalism. Losses in export competitiveness does not help regionalism neither, this is perhaps tied to a rationale to make up for lost export revenues by avoiding import tariff reductions and avoid lost fiscal revenues. On the other hand, when REC trading partners face increased non-tariff barriers to imports, they are "compensated" through reductions in the preferential rate charged to them in order to increase their preference margins. There is also statistical evidence that in the African context, regionalism neither hurts nor helps multilateralism. However in setting their MFN rates, African countries take into account non-tariff barrier constraints and their dependence on multilateral institutions for financial support. Losses in export competitiveness tend to lead African countries to charge higher MFN rates while prohibitive barriers to imports lead them to "compensate" importers with lower import tariffs. Going back to the two empirical questions posed in the paper: i) whether Most Favored Nation (MFN) applied tariffs set by African countries exert an influence on the preferential tariffs that they impose on members of their own regional economic community? and (ii) whether preferential tariffs set by African countries on their REC members have an influence on MFN applied tariffs set for members outside their regional economic community? The answers, based on the available evidence is yes to the first question 5

6 and no to the second. While this paper finds no evidence that regionalism helps or hurts multilateralism in Africa, it finds evidence on the other hand that multilateralism hurts regionalism in Africa. This report could be used by the organization, especially UNCTAD to make specific policy recommendations to African policy makers on the interface between regionalism and multilateralism. African countries should strategically set their MFN rates and the preferential rates of their different types of trading partners with a view to deepening regional integration in Africa. Policies for removing nontariff barriers or lowering trade costs must be effectively implemented in order to boost intra-african trade. 6

7 Introduction Focus and purpose of the report The focus of this report is to study the interface between regionalism and multilateralism in Africa from an empirical perspective. The main idea is to investigate two key empirical questions: Whether Most Favored Nation (MFN) applied tariffs set by African countries exert an influence on the preferential tariffs that they impose on members of their own bloc? and; Whether preferential tariffs set by African countries on their bloc members have an influence on MFN applied tariffs set for members outside their regional economic bloc? The purpose of the report is to shed light on whether external trade liberalization pressures affect the setting of preferential rates by African countries for its African trading partners (within their regional economic community and outside their regional economic community), that is whether multilateralism is a building or stumbling bloc for regionalism in Africa. Similarly it sheds light on whether preferential rates set by African countries for their African trading partners influence the MFN rates granted by African countries to external trading partners, whether regionalism is a building or stumbling bloc for multilateralism in Africa. Answers to questions of this nature have policy implications for the regional integration process in Africa and can provide guidance to policy makers on the "right" sequencing and timing of tariff cuts in their trade policies. Background, context and relevance Regional integration and the boosting of intra-africa trade are key priorities for African governments and its development partners, as evidenced in several main strategic African Union (AU) documents and in decisions that were made at a high political level by African Heads of State. The Africa Agenda 263 set out the vision of African leaders for the continent for the next 5 years and acknowledges "the critical role of Regional Economic Communities as building blocks for continental unity" (Paragraph 3, Page 1, AU 215). The AU Action Plan for Boosting Intra-African Trade (BIAT), endorsed at the Assembly of the Heads of State and Government of the African Union, during its 18 th Ordinary Session in January 212, reflected the commitment of African governments to accelerate market integration on the continent. At that same summit African leaders made a decision to establish a Pan-Africa Continental Free Trade Area (CFTA) by 217. Against this backdrop, empirical research on the factors promoting or hindering regional trade and regional integration in Africa is highly relevant. Yet so far, to the best of our knowledge, scant or no empirical research exists on the interface between regionalism and multilateralism in Africa. While a theoretical and empirical literature exists on whether regionalism and multilateralism are "friends" or "foes", research on that issue specific to Africa is scarce. This report intends to fill an important gap in that regard. Scope and direction of the report The report is divided into two sections: Section I highlights a few empirical facts on the state of intra-bloc trade in Africa while Section II outlines the methodology, data and estimaton results for answering the two main empirical questions of the report as cited above. 7

8 Body of the Report I. Regional integration and trade in Africa. A. Brief history of regional integration in Africa and its current challenges. Regional integration has a long standing history in Africa. In the aftermath of the creation of the Organization of African Unity in 1963, several regional economic communities or RECs saw the day. According to De Melo (215), that first wave of regional integration efforts or regional integration arrangements (RIAs), based on the idea that the RECs will form the building blocs for the emergence of a unified continent, failed for several reasons, both economic and political. Non-economic reasons involved a reluctance on the part of post-independence leaders to surrender national sovereignty and to create the supra-national regional authorities that were needed to deepen regional integration and regional coordination. A second wave of RIAs emerged after the signature of the Abuja Treaty in 1991 in which a linear approach to regional integration was adopted (see Table 1) with a focus on trade in goods. Countries committed to first form Free Trade Areas (FTA) to accelerate goods market integration, to be followed by the formation of a Customs Union (CU) with a common external tariff (CET). The integration of goods markets should have been followed by the integration of labor and capital markets, the creation of a common market, fiscal and monetary integration to finally culminate in a full economic and political union. Table 2 depicts the current 8 main regional economic communities recognized by the African Union as building blocs for advancing continental integration in Africa. These are the Arab Maghreb Union (AMU), the Community of Sahel-Saharan States (CEN-SAD), the Common Market for Eastern and Southern Africa (COMESA), the Economic Community of Central African States (ECCAS), the Economic Community for Western African States (ECOWAS), the Eastern African Community (EAC), the Inter-governmental Authority on Government (IGAD), and the Southern African Development Community (SADC). Out of these 8 RECS, so far in 217, only EAC, ECOWAS and COMESA have established a Customs Union while ECCAS and SADC are FTAs. However their operationalization, within a linear model to regional integration, is yet to become fully effective. De Melo notes that along this linear sequence, except for the Southern African Customs Union (SACU), none have really reached full CU status because exceptions to the 4-5 CET tariff band structure are so numerous. For example, the ECOWAS CET includes an exceptions list of about 3 products eligible for exemption from the new tariffs that includes 2 products from the former Nigerian Import Ban list (De Melo, 216). Amidst announced plans for SADC, EAC and COMESA to merge into a Tripartite Free Trade Area (TFTA), and for the region to form a Continental Free Trade Area CFTA) by 217, there have been calls of late for the continent to abandon its linear approach to regional integration through large membership and to focus instead on integration in small groups. The linear model of integration, with its focus on goods, has not resulted in impressive levels of trade performance with the volume of intra-regional trade in African RIAs estimated to be on average 4 percent less than potential trade. Trade costs among partners have fallen less rapidly than trade costs with outside partners (DeMelo, 216). African borders remain thick owing not only to the geography of African trade, low trade complementarity across partners, poor logistics, border delays, but also the neglect of services in the African linear integration model which is no longer adapted to 21 st century trade (DeMelo, 216). The way forward should include 8

9 a greater recognition of the growing importance of trade in tasks and trade in services. Intra-African barriers to trade in services should be dismantled in parallel to the dismantling of tariff and non-tariff barriers in trade in goods (UNCTAD, 215); trade facilitation measures at the border should be emphasized along with policy reforms to attract FDI in services activities. According to De Melo (216), negotiations in small groups are less likely to to be marred by tensions between small economies and larger ones over the distribution of the costs and benefits to the integration process and over the delegation of authority to supra-national bodies. Multilateral think tanks such as UNCTAD and the Economic Commission for Africa (ECA) have also pointed out that intra-african trade has been hampered by a lack of productive and trading capacities among African countries that remain overly dependent on primary commodities and are poorly economically diversified. Overlapping memberships (see Table 3) of RECs by some countries complicate further their tasks of meeting all their requirements as REC members when it comes to streamlining trade procedures and removing tariff and non-tariff barriers. In other words, overlapping memberships slows the implementation of regional trade agreements. The prevalence of large informal economies and preponderance of informal cross-border trade weaken the scope for enforcing policy reforms. Insufficient infrastructure such as the lack of efficient transit corridors connecting landlocked countries to coastal states compound the challenges behind regional integration in Africa. That is to say that the deepening of regional integration in Africa inevitably goes beyond a mere lowering of tariff and non-tariff barriers. Sigificant manifold hurdles remain on the road towards a single African Economic Community. There are 4 main pillars where substantial progress is required in order to bring to fruition the African Economic Community (AEC) and these are: (i) trade and market integration (ii) macroeconomic policy convergence, financial and monetary integration (iii) peace, security and stability and (iv) harmonisation of sectoral policies in infrastructure, natural resources, climate, food, gender and agriculture (sourc: ECA Observatory on Regional Integration in Africa). A 29 review of African RECs (GTZ, 29) made the following six recommendations to accelerate regional integration in Africa: Design mechanisms to mainstream and measure informal trade within regional integration; Enhance policy convergence within RECs; Enhance the coordination between RECs and member countries; Design creative and innovative ways to secure political will and stakeholders support for regional integration; Establish mechanisms to ensure that the process of continental integration led by the African Union are complementary and supportive to regional integration efforts and vice versa; Redress the underlying structural constraints including deep seated distrust among member states, which fundamentally limit the depth and progress in regional integration. These recommendations remain valid today. UNCTAD in its Economic Development in Africa Report 213 has recommended African countries to adopt a model based on Developmental regionalism over the pursuit of a linear approach to integration. Developmental regionalism encompasses cooperation and coordination among countries in a larger array of areas, ranging from the development of spatial economic 9

10 corridors, implementation of common regional industrial policies, creation of special economic zones to the spawning of regional value-chains. It calls for greater attention to the building of entrepreneurial capabilities and productive capacities within countries and deeper involvement of the private sector in the regional integration process. In its Report, UNCTAD advocates for African countries to move away from a linear and process-based approach to regional integration, which focuses mostly on the removal of trade barriers, to a development-based approach, which pays as much attention to the building of productive capacity and private sector development as to the elimination of trade barriers ( Page 133, UNCTAD 213). Table 1. Milestones in the history of African Regional Integration Milestone Description Date 1963 Formation of the Organization of African Unity (OAU), the forerunner of the African Union. 198 Lagos Plan of Action for the Economic Development of Africa, whose objective was to promote the economic and social development and integration of African economies so that African economies achieve an increasing measure of self-sufficiency and self-sustainment. The Lagos Plan of Action also committed African States to promote the economic integration of the continent and to establish national, sub-regional and regional institutions which will facilitate the attainment of objectives of self-reliance and selfsustainment African Charter on Human and People s Rights drafted. A protocol to the charter was adopted in 1988 and came into effect in Africa s Priority Programme for Economic Recovery (APPER), later reconverted and subsumed into the United Nations Programme of Action for African Economic Recovery and Development, (UN- PAAERD). In the APPER, African governments, afflicted by an economic crisis, reaffirmed their responsibility for the development of their countries and undertook to mobilize and utilize domestic resources to achieve their identified priorities Treaty Establishing the African Economic Community (AEC) known as The Abuja Treaty, which came into force in The objectives of the Community were set to be among others to : (i) promote economic, social and cultural development and the integration of African economies in order to increase economic self-reliance and promote an endogenous and self-sustained development; and (ii) to coordinate and harmonize policies among existing and future economic communities in order to foster the gradual establishment of the Community Sirte Declaration 2 Solemn Declaration on security, stability, development and cooperation of the African continent 2 AU New Partnership for Africa s Development (NEPAD) 21 AU Constitutive Act April 27 Study on Rationalization of the Regional Economic Communities (RECs): Review of the Abuja Treaty and Adoption of the Minimum Integration Programme was completed and presented at the Second Conference of Ministers in Charge of Integration in Rwanda, in July Elaboration of Minimun Integration Programmes (MIP). AUC should coordinate REC activities and harmonize their policies and programmes, as recommended in the AU decision taken in The Gambia; and The free movement of persons, goods, capital and services among and across all RECs should be encouraged and promoted to accelerate continental integration. 212 The Heads of State of the African Union in January 212 adopted a decision to establish a Continental Free Trade Area (CFTA) by an indicative date of 217. The Summit also endorsed the Action Plan on Boosting Intra-Africa Trade (BIAT) which identifies seven priority action clusters: trade policy, trade facilitation, productive capacity, trade related infrastructure, trade finance, trade information, and factor market integration. The aim was that the CFTA should be operationalized by the indicative date of 217, based on a framework, roadmap and architecture, with the following milestones: 1. Finalization of the East 1

11 African Community (EAC)/the Common Market for Eastern and Southern Africa (COMESA)/Southern African Development Community (SADC) Tripartite FTA initiative by Completion of FTA(s) by Non-Tripartite RECs, through parallel arrangement(s) similar to the EAC-COMESA-SADC Tripartite Initiative or reflecting the preferences of their Member States, between 212 and Consolidation of the Tripartite and other regional FTAs into a Continental Free Trade Area (CFTA) initiative between 215 and Establishment of the Continental Free Trade Area (CFTA) by 217 with the option to review the target date according to progress made. 215 The COMESA-EAC-SADC Tripartite Free Trade Area (TFTA) was officially launched by Heads of State and Governments of COMESA, EAC and SADC on 1 June, 215 in Sharm El Sheikh, Egypt at the Third Tripartite Summit. The Tripartite Summit gave Member States 12 months from the launch of the TFTA to conclude outstanding negotiations issues on rules of origin, trade remedies and tariff offers. Due to a number of challenges, the deadline was not met, and the commencement of Phase II negotiations covering trade in services and other trade related matters has been delayed pending the conclusion of negotiations on Phase I issues. Twenty four Member States have signed the Declaration; only Libya and Eritrea have yet to sign. The Agreement needs 14 ratifications to enter into force but so far only 8 countries have ratified it. The TFTA will consist of 26 member countries, half of Africa s GDP, 56 per cent of the continental population and 636 million customers. Stages set out in the 1991 Abuja Treaty The Community shall be established gradually in six (6) stages of variable duration over a transitional period not exceeding thirty-four (34) years. Stage 1 Strengthening of existing regional economic communities and, within a period not exceeding five (5) years from the date of entry into force of this Treaty, establishing economic communities in regions where they do not exist. Stage 2 At the level of each regional economic community and within a period not exceeding eight years, Tariff Barriers and Non-Tariff Barriers, Customs Duties and internal taxes existing at the date of entry into force of the Treaty should be stabilised; and studies prepared and adopted to determine the time-table for the gradual removal of Tariff Barriers and NonTariff Barriers to regional and intra-community trade. There should also be gradual harmonisation of Customs Duties in relation to third States. Sectoral integration should be strengthened at regional and continental levels particularly in the fields of trade, agriculture, money and finance, transport and communications, industry and energy; and there should be co-ordination and harmonisation of activities among the existing and future economic communities. Stage 3 At the level of each regional economic community and within a period not exceeding ten (1) years, establishment of a Free Trade Area through the observance of the time-table for the gradual removal of Tariff Barriers and Non-Tariff Barriers to intra-community trade and the establishment of a Customs Union by means of adopting a common external tariff. Stage 4 Within a period not exceeding two (2) years, co-ordination and harmonisation of tariff and non-tariff systems among the various regional economic communities with a view to establishing a Customs Union at the continental level by means of adopting a common external tariff. Stage 5 Within a period not exceeding four (4) years, establishment of an African Common Market through: (i) the adoption of a common policy in several areas such as agriculture, transport and communications, industry, energy and scientific research; (ii) the harmonisation of monetary, financial and fiscal policies; (iii) the application of the principle of free movement of persons as well as the provisions regarding the rights of residence and establishment; and (iv) constituting the proper resources of the Community as provided for in paragraph 2 of Article 82 of the Treaty. Stage 6 Within a period not exceeding five (5) years: (i) Consolidation and strengthening of the structure of the African Common Market, through including the free movement of people, goods, capital and services, as well as, the provisions regarding the rights of residence and establishment; (ii) Integration of all the sectors namely economic, political, social and cultural; establishment of a single domestic market and a Pan- African Economic and Monetary Union; (iii) Implementation of the final stage for the setting up of an African Monetary Union, the establishment of a single African Central Bank and the creation of a single African Currency; (iv) Implementation of the final stage for the setting up of the structure of the Pan- African Parliament and election of its members by continental universal suffrage; (v) Implementation of 11

12 the final stage for the harmonisation and co-ordination process of the activities of regional economic communities; (vi) Implementation of the final stage for the setting up of the structures of African multinational enterprises in all sectors; and (vii) Implementation of the final stage for the setting up of the structures of the executive organs of the Community. Sources: African Union website; ECA ARIA IV (21); Text of Abuja Treaty (1991); TRALAC ( Table 2 Regional Economic Communities (RECs) in Africa Name of block Economic Community of Western Africa States Economic Community of Central African States Inter-governmental Authority on Development Acronym, date of creation and corresponding region in Abuja Treaty* ECOWAS, West Africa, established in 1975, a revised treaty signed in 1993 ECCAS, Central Africa, established in 1983 IGAD, established in 1996, superseding the Inter-governmental Authority on Drought Member states (as at 31 Dec 216) 15: Benin, Burkina Faso, Cabo Verde, Côte d Ivoire, The Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo. 1: Angola, Burundi, Cameroon, Central African Republic, Chad, Congo, Democratic Republic of the Congo, Equatorial Guinea, Gabon, and Sao Tome and Principe. 8: Djibouti, Eritrea, Ethiopia, Kenya, Somalia, South Sudan, Sudan and Economic and Governance Indicators GDP: 664 billion US GDP per capita: 1,91 US Population:349 million Area: 5.1 million sq.km Court of Justice: Community Court of Justice Legislative Assembly: No Regional Bank: The ECOWAS Bank for Investment and Development (EBID); GDP:268 billion US GDP per capita: 1,532 US Population:175 million Area: 6.5 million sq.km Court of Justice: The Court of Justice (not yet operational) Legislative Assembly: No Regional Bank: No GDP:251 billion US GDP per capita: 988 US Population:254 million Area: 5.5 million sq.km Current status (as at 31 Dec 216) Customs Union with an ECOWAS Common External Tariff since 216. ECOWAS Trade Liberalization Scheme (ETLS) established in 1975 and revised in 1991 to include industrial products and establish rules of origin. Within ECOWAS, the Western African Economic and Monetary Union (WAEMU) operates among 8 countries (Benin, Burkina Faso, Cote d Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo). It is a customs union and currency union (CFA Franc as single currency). FTA signed in 24 and came into force in 26. Within ECCAS, CEMAC (in French, Communauté Economique et Monétaire de l Afrique Centrale) operates as an FTA with a Common External Tariff on non-cemac countries and a common currency the CFA Franc. Countries include Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea and Gabon. CEMAC is the successor to the UDEAC (In French, Union Douanière et Economique de l Afrique Centrale), a customs union, made effective in Pre-FTA phase of market integration 12

13 Arab Maghreb Union Community of Sahel- Saharan States East African Community Southern African Development Community and Development founded in AMU, Northern Africa, established and treaty signed in 1989 CEN-SAD, North, established in 1998 EAC, East, relaunched in 21 after dissolution of the previous Cooperation Treaty in Originally founded in SADC, South, SADC treaty signed in 1992, successor to Southern African Development Coordinating Conference, SADCC. Uganda 5: Algeria, Libya, Mauritania, Morocco, Tunisia 24: Benin, Burkina Faso, Central African Republic, Chad, the Comoros, Côte d Ivoire, Djibouti, Egypt, Eritrea, the Gambia, Ghana, Guinea-Bissau, Libya, Mali, Mauritania, Morocco, Niger, Nigeria, Senegal, Sierra Leone, Somalia, the Sudan, Togo and Tunisia. 6: Burundi, Kenya, Rwanda, South Sudan, Uganda and United Republic of Tanzania. 15: Angola, Botswana, the Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe Court of Justice: No Legislative Assembly: No Regional Bank: No GDP: 374 billion US GDP per capita: US 3,914 Population: 95 million Area: 5.8 million sq.km Court of Justice: No Legislative Assembly: No Regional Bank: Maghreb Bank for Investment and Foreign Trade GDP: 1,32 billion GDP per capita: 2,133 US Population: 619 million Area: 14.3 million sq.km Court of Justice: No Legislative Assembly: No Regional Bank: Sahel- Saharan Bank for Investment and Trade GDP:144 billion US GDP per capita: 89 US Population:161 million Area: 2.5 million sq.km Court of Justice: East African Court of Justice Legislative Assembly: Yes Regional Bank: East African Development Bank GDP:65 billion US GDP per capita: 2,24 US Population:321 million Area: 1 million sq.km Court of Justice: SADC Tribunal Legislative Assembly: No Regional Bank: No Customs Union signed in 24 and came into force from 25 Free Trade Area in 28. Customs Union delayed but in progress. The Regional Indicative Strategic Development Plan (RISDP) and the Strategic Indicative Plan for the Organ (SIPO) remain the guiding frameworks for SADC Regional Integration. Within SADC, SACU (Southern African Customs Union), comprising Botswana, Lesotho, Namibia, South Africa, Swaziland, operates as a customs union and all except Botswana use the South African Rand as a common currency within the Common Monetary Area. It operates a FTA with the European Free Trade 13

14 Common Market for Eastern and Southern Africa COMESA, East and South, formed in 1994, as a successor to the PTA for Eastern and Southern Africa formed in : Burundi, the Comoros, the Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Sudan, Swaziland, Seychelles, Uganda, Zambia and Zimbabwe. GDP:696 billion US GDP per capita: 1,377 US Population:55 million Area: 12 million sq.km. Court of Justice: COMESA Court of Justice Legislative Assembly: No Regional Bank: The Trade and Development Bank for Eastern and Southern Africa (PTA- Bank) Association (EFTA), consisting of Iceland, Liechtenstein, Norway and Switzerland and a PTA with MERCOSUR (Argentina, Brazil, Paraguay and Uruguay). Free Trade Area in 2. Customs Union launched in 29 and not yet operationalized. Notes: * The Abuja Treaty recognizes five regions in Africa: North,West, East, South and Central. GDP and GDP per capita based on US dollars in current prices at 215. Sources: GTZ (29);ECA Observatory on Regional Integration in Africa website; UNCTADStat database (accessed March 217). Table 3 Overlapping memberships in African RECs recognized by the AU Country Member of only one REC Algeria* Botswana Cameroon Cabo Verde* Congo Equatorial Guinea Gabon Guinea Lesotho Liberia Madagascar Mozambique* Namibia Sao Tome and Principe* South Africa Member of 2 RECs Angola Benin Burkina Faso Central African Republic Chad Comoros Cote d Ivoire Egypt** Ethiopia** Gambia** Ghana** Guinea-Bissau Malawi** Mali Mauritania** REC AMU SADC ECCAS ECOWAS ECCAS ECCAS ECCAS ECOWAS SADC ECOWAS COMESA SADC SADC ECCAS SADC ECCAS, SADC CENSAD, ECOWAS CENSAD, ECOWAS CENSAD, ECCAS CENSAD, ECCAS CENSAD, COMESA CENSAD, ECOWAS CENSAD, COMESA COMESA, IGAD CENSAD, ECOWAS CENSAD, ECOWAS CENSAD, ECOWAS COMESA, SADC CENSAD, ECOWAS AMU, CENSAD 14

15 Mauritius COMESA, SADC Morocco** AMU, CENSAD but has applied for membership of ECOWAS in 217 Niger CENSAD, ECOWAS Nigeria** CENSAD, ECOWAS Rwanda COMESA, EAC Senegal CENSAD, ECOWAS Seychelles COMESA, SADC Sierra Leone ECOWAS, CENSAD Somalia** CENSAD, IGAD South Sudan** IGAD, EAC Swaziland COMESA, SADC Togo CENSAD, ECOWAS Tunisia** AMU, CENSAD United Republic of Tanzania EAC, SADC Zambia COMESA, SADC Zimbabwe** COMESA, SADC** Member of 3 RECs Burundi COMESA, EAC, ECCAS Dem. Republic of Congo COMESA, ECCAS, SADC Djibouti*** CENSAD, COMESA, IGAD Eritrea*** CENSAD, COMESA, IGAD Kenya COMESA, EAC, IGAD Libya*** AMU, CENSAD, COMESA Sudan CENSAD, COMESA, IGAD Uganda COMESA, EAC, IGAD Note: *Member of only one regional community, including other regional communities not recognized by the AU as building blocks for continental regional integration. **Member of only two regional communities, including other regional communities not recognized by the AU as building blocks for continental regional integration. ***Member of only three regional communities, including other regional communities not recognized by the AU as building blocks for continental regional integration. Above table is based on information as at 31 March 217. B. State of trade (exports and imports) within RECs. Disappointing results in terms of intra-bloc trade and intra-bloc Foreign Direct Investment have been highlighted in several UNCTAD reports (UNTAD, 29. UNCTAD, 213). However while the shares of intra-trade tend to be low within the bloc, a more substantial level of trade occurs outside the bloc within the region. Significant heterogeneity also exists in intra-bloc trade performance among the 8 blocs. The disappointing performance among some RECs is strongly linked to the region's lack of economic and export diversification, rather than the mere presence of barriers to trade alone. Based on Tables 4-5, the following inferences can be made on the state of intra-bloc trade by RECs in the period 1995 to 216, when comparing these two years: EAC, ECOWAS, IGAD and SADC had the largest shares of intra-bloc exports both in 1995 and in 216. In 216 that figure ranged between 11 to 22 per cent, compared to 24 per cent in ASEAN and 14 per cent in MERCOSUR; EAC, ECOWAS, and SADC were the 3 blocs with the largest shares of intra-bloc imports both in 1995 and 216, and in 216 that figure ranged between 7 to 21 per cent, compared to 23 per cent in ASEAN and 15 per cent in MERCOSUR; The shares of intra-bloc imports are lower than the shares of intra-bloc exports for most blocs; All RECs over the period had increased their share of intra-bloc trade on the export side but on the import side, the picture is more mixed; the share of intra-bloc imports fell in AMU, EAC, and IGAD; There is substantial intra-african trade that occurs outside regional blocs; 15

16 On the export side, COMESA, EAC, ECCAS and IGAD exported more than 6 per cent of their products on the continent in 216 while in 1995 only ECCAS and IGAD did so; On the import side, COMESA, ECCAS and IGAD imported more than 65 per cent of their goods from within the continent, while in 1995 only COMESA and ECCAS did so; Comparing 216 to 1995, ECOWAS increased its share of intra-african exports by 2 percentage points, followed by AMU (+17 per cent), CENSAD (+15) and EAC (+12). The share fell only in IGAD; Comparing 216 to 1995, EAC increased its share of intra-african imports by 3 percentage points, followed by IGAD (+21), CENSAD (+14) and ECOWAS (+11). The shares fell only in COMESA and ECCAS; If figures are compared for 1995 and 216, on the export side, all regional blocs, except IGAD have raised their shares of intra-bloc exports and intra-african exports. On the import side, only AMU, ECCAS and IGAD have seen a decrease in their share of intra-bloc imports while only COMESA and ECCAS have had a decrease in their share of intra-african imports, though in both blocs intra-african imports remain high at more than 65 per cent. A priori it seems that the formation of regional blocs is not a pre-requisite for boosting intra-african trade and the culprit could lie in the lack of effective implementation in regional trade agreements. However more rigorous empirical research is needed to investigate whether the formation of regional blocs have diverted trade to the blocs or not. It has been stated that that regional integration in Africa could serve as a launching pad for the development of an indigenous manufacturing sector in Africa, given that intra-african trade is more manufacturing-intensive than the trade of Africa with the rest of the world (UNCTAD, 29; UNCTAD, 213). Table 6 shows the product composition of exports and imports in 1995 and 216 for each regional bloc by type of trading partner: (i) intra-bloc, that is trade with members within the given bloc (ii) intra-african trade, that is trade with African countries outside of the bloc and (iii) trade with the rest of the world (excluding Africa), that is trade with all non-african members. In ALL regional economic blocs, intra-bloc exports are far more intensive in manufactures than exports with the rest of the world and this holds both in 1995 and 216. However, comparing 216 to 1995, intrabloc exports have become less intensive in manufactures over time in AMU, COMESA, EAC, IGAD and SADC, but exports with the rest of the world have become more intensive in manufactures in all blocs, except for ECCAS, ECOWAS and SADC. Intra-bloc imports on the other hand are less intensive in manufactures than imports with the rest of the world, and this reflects the region s poor and undiversified manufacturing base. The share of manufactures in imports is always lower in the case of intra-bloc trade than trade with the rest of the world and this for all blocs. When comparing 216 to 1995, intra-bloc imports have become more manufacturing intensive only in CENSAD and ECCAS. Increasing economic diversification through manufacturing development can contribute towards the deepening of regional trade in Africa. 16

17 Table 4: Export Patterns across Regional Economic Communities Regional Economic Community Intra-group Rest of region Rest of world Intra-group Rest of region Rest of world Intra-group Rest of region Rest of world Intra-group Rest of region Rest of world AMU (Arab Maghreb Union) 3,9 28,46 96,1 2,15 28,71 97,85 1,94 39,2 98,6 4,36 45,7 95,64 CEN-SAD (Community of Sahel-Saharan States) 7,48 24,84 92,52 6,67 24,9 93,33 6,46 31,8 93,54 9,62 38,16 9,38 COMESA (Common Market for Eastern and Southern Africa) 5,7 52,51 94,3 4,8 56,95 95,2 5,24 49,16 94,76 9,87 52,35 9,13 EAC (East African Community) 17,5 37,14 82,5 17,28 4,73 82,72 18,95 47,15 81,5 21,75 44,96 78,25 ECCAS (Economic Community of Central African States) 1,39 65,51 98,61,91 53,53 99,9,86 72,98 99,14 2,8 66,38 97,92 ECOWAS (Economic Community of West African States) 9,43 2,49 9,57 9,15 25,36 9,85 9,54 3,82 9,46 11,67 38,34 88,33 IGAD (Intergovernmental Authority on Development) 11,81 51,6 88,19 13,7 4,98 86,93 11,22 45,6 88,78 17,11 43,73 82,89 SADC (Southern African Development Community) 14,66 15,8 85,34 11,98 15,97 88,2 1,83 2,96 89,17 21,7 11,65 78,93 ASEAN (Association of Southeast Asian Nations) 24,92 58,9 75,8 23, 6,95 77, 25,25 6,59 74,75 24,1 64,11 75,99 EU28 (European Union) 61,77 9,23 38,23 67,73 7,5 32,27 67,83 8,83 32,17 63,74 9,45 36,26 MERCOSUR (Southern Common Market) 19,7 66,12 8,93 18,6 72,5 81,94 11,61 79,9 88,39 14,3 63,88 85,97 Source : UNCTADStat (downloaded July 217). Note : Rest of the world includes African countries outside the bloc. 17

18 Table 5: Import Patterns across Regional Economic Communities Regional Economic Community Intra-group Rest of the region Rest of the world Intra-group Rest of the region Rest of the world Intra-group Rest of the region Rest of the world Intra-group Rest of the region Rest of the world AMU (Arab Maghreb Union) 3,62 31,52 96,38 3,13 36,48 96,87 2,97 4,78 97,3 2,73 41,8 97,27 CEN-SAD (Community of Sahel-Saharan States) 5,7 19,53 94,3 6,5 26,57 93,5 6,98 32,71 93,2 6,15 32,96 93,85 COMESA (Common Market for Eastern and Southern Africa) 4,16 7,6 95,84 4,99 71,39 95,1 6,19 66,4 93,81 5,63 6,31 94,37 EAC (East African Community) 1,54 15,37 89,46 12,58 46,44 87,42 1,56 53,44 89,44 7,11 49,27 92,89 ECCAS (Economic Community of Central African States) 2,61 82,8 97,39 2,48 88,4 97,52 2,53 88,47 97,47 3,58 8,96 96,42 ECOWAS (Economic Community of West African States) 8,4 2,29 91,6 12,53 21,6 87,47 12,47 25,57 87,53 9,95 29,76 9,5 IGAD (Intergovernmental Authority on Development) 7,2 36,48 92,98 9,56 42,73 9,44 5,87 55,99 94,13 3,98 6,86 96,2 SADC (Southern African Development Community) 14,99 9,87 85,1 2,25 6,65 79,75 17,61 1,94 82,39 21,3 11,41 78,97 ASEAN (Association of Southeast Asian Nations) 18,4 71,41 81,96 22,19 67,44 77,81 25,64 64,53 74,36 22,62 69,72 77,38 EU28 (European Union) 59,77 1,1 4,23 61,25 9,97 38,75 61,45 11,8 38,55 59,66 11,21 4,34 MERCOSUR (Southern Common Market) 17,68 66,3 82,32 2,6 61,73 79,94 19,19 6,36 8,81 15,19 62,84 84,81 Source : UNCTADStat (downloaded August 217).Note : Rest of the world includes African countries outside the bloc. 18

19 Table 6: Product composition of trade by regional bloc a. AMU Exports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa) Primary commodities 48,61 58,16 3,35 49,54 71,95 63,3 Manufactured goods 51,39 41,84 69,42 49,92 27,94 36,52 Other,1,,23,54,11,45 Imports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa) Primary commodities 52,47 68,16 73,29 53,52 31,61 29,77 Manufactured goods 47,53 31,84 26,7 46,6 63,57 7,9 Other,,,1,42 4,82,14 b. CENSAD Exports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa) Primary commodities 6,99 56,31 38,61 57,55 77,17 7,96 Manufactured goods 38,39 42,91 6,85 42,16 22,58 28,49 Other,61,78,23,23,25,56 Imports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa) Primary commodities 6,9 6,5 77,96 59,86 27,76 31,73 Manufactured goods 38,83 39,19 21,25 37,74 67,19 67,77 Other,27,31,23,23 5,5,5 c. COMESA Exports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa) Primary commodities 42,35 49,36 59,3 53,44 83,11 73,22 Manufactured goods 57,57 48,5 4,66 42,5 16,65 24,73 Other,8 2,13,31 4,51,25 2,6 Imports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa) Primary commodities 4,99 58,29 29,67 36,31 28,86 3,85 Manufactured goods 58,92 41,22 7,26 63,56 69,7 67,98 Other,9,49,7,13 1,44 1,17 d. EAC Exports Intra-Group Intra-African (outside blocrest of World (excl. Africa) Primary commodities 41,54 47,4 65,35 56,1 92,81 88,48 Manufactured goods 58,29 51,45 34,1 43,72 6,62 11,6 Other,17 1,51,55,27,56,46 Imports Intra-Group Intra-African (outside blocrest of World (excl. Africa) Primary commodities 4,66 42,53 45,9 31,39 24,71 28,59 Manufactured goods 59,31 57,42 54,4 68,56 74,1 7,87 Other,3,4,88,5 1,28,54 Source : UNCTADStat (downloaded August 217). 19

20 e. ECCAS Exports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa) Primary commodities 58,69 52,67 75,79 88,33 98,36 96,24 Manufactured goods 41,28 47,27 18,25 11,27 1,77 2,2 Other,3,6 5,97,39 -,13 1,55 Imports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa) Primary commodities 52,13 49,63 55,57 44,12 24,78 23,26 Manufactured goods 47,75 5,24 44,26 55,67 74,11 75,3 Other,12,13,17,21 1,11 1,71 f. ECOWAS Exports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa Primary commodities 69,98 64,49 69,42 79,37 94,9 95,28 Manufactured goods 29,58 35,49 3,16 2,3 4,93 4,36 Other,44,2,42,33,17,36 Imports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa Primary commodities 72,42 69,64 6,22 36,18 22,4 29,37 Manufactured goods 27,29 3,34 37,37 63,35 71,97 7,45 Other,29,2 2,42,48 5,99,18 g. IGAD Exports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa) Primary commodities 43,17 45,93 55,73 43,38 9,91 82,87 Manufactured goods 56,83 41,52 44,2 56,55 8,47 16,44 Other, 12,55,6,8,62,68 Imports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa) Primary commodities 42,17 47,35 24,65 34,9 27,44 25,59 Manufactured goods 57,83 43,32 75,18 64,74 71,22 73,51 Other, 9,33,17,36 1,34,89 h. SADC Exports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa) Primary commodities 39,2 49,41 37,68 42,81 68,67 76,92 Manufactured goods 59,54 5,41 61,76 56,97 29,5 21,82 Other 1,26,18,56,22 2,28 1,26 Imports Intra-Group Intra-African (outside bloc) Rest of World (excl. Africa) Primary commodities 33,73 47,35 69,44 79,4 22,83 24,63 Manufactured goods 64,86 52,46 3,34 2,87 69,95 69,49 Other 1,41,19,22,1 7,22 5,88 Source : UNCTADStat (downloaded August 217). 2

21 However more research is needed to investigate how the setting of tariff barriers, both MFN and preferential rates, and non-tariff barriers impact quantitatively on intra-bloc trade and intra-trade in the African region. The Economic Commission for Africa found in 21 that the costs of non-tariff barriers exceeded the costs of tariff barriers in Africa. With the advent of the Trade Facilitation Agreement (TFA) at the World Trade Organization, in international development circles, trade facilitation has been rising in preeminence on the trade agenda as a driver for increasing the integration of developing economies into regional and global markets. II. The interface between regionalism and multilateralism in Africa: An empirical perspective The major focus of this research paper is to explore the interface between regionalism 1 and multilateralism in Africa empirically by addressing two empirical questions: (i) whether Most Favored Nation (MFN) applied tariffs set by African countries exert an influence on the preferential tariffs 2 that they impose on members of their own bloc? and (ii) whether preferential tariffs set by African countries on their bloc members have an influence on MFN applied tariffs set for members outside their regional economic bloc? The remainder of this paper is organized as follows: first a brief review of the literature on the interface between regionalism and multilateralism is provided; second the methodology used in the paper is laid out; third the data used for the empirical analysis is described and fourth the estimation results are described and discussed. A. Brief literature review: Building blocs v/s Stumbling blocs 3 debate The issue of whether increased regionalism by countries may affect how they liberalize their trade externally, that is to the rest of the world, though an old one, became prominent again in the early 2s as more and more countries were signing up to Regional Trade Agreements. As of October 215 for instance, there were 265 RTAs notified to the WTO (Acharya, 216). At the time of writing the WTO website reports that in the period , GATT had received 124 notifications of RTAs (relating to trade in goods), and since the creation of the WTO in 1995, over 4 additional arrangements covering trade in goods or services have been notified to the organization. While some economists like Larry Summers viewed regionalism as a building bloc for multilateralism, others such as Jagdish Bhagwati expressed scepticism, purporting to the argument that on the contrary regionalism could be a stumbling bloc to multilateralism since regionalism could blunt the incentives of member countries to liberalize visà-vis non-members. Both the theoretical and empirical economic literature yields ambiguous results on 1 Regionalism refers to PTAs defined by a geographic region (Bhagwati and Panagariya, 1996). 2 Due to data constraints, non-tariff barriers are not explicitly included in the analysis. Due to limited data availability and issues over the quality of the data, the methodology outlined in the original proposal was subsequently modified. 3 The phraseology and conceptualization of PTAs that, in a dynamic time-path sense, contribute to the multilateral freeing of trade either by progressively adding new members (down the PTA path to worldwide free trade) or by prompting accelerated multilateral trade negotiations and are thus "building blocks" towards the multilateral freeing of trade and those that do the opposite and hence are "stumbling blocks" to the goal of worldwide, multilateral freeing of trade, owes to Bhagwati (1991, p. 77) and has been adopted by Lawrence (1991) and others. (Bhagwati and Panagariya, Page 3, 1996). 21

22 this building bloc v/s stumbling bloc debate. One view is that as countries form preferential agreements, the preferential tariffs could lead to trade diversion, diverting trade away from more efficient producers to less efficient ones (under classic Viner Theory). In a context of maximizing national welfare, governments will match preferential tariffs with reductions in most-favored-nation, external, tariffs as a way to bring imports back to the more efficient sources. Another view holds that in equilibrium, FTAs could result in higher external tariffs by lowering the cost of FTA insiders to lobby against FTA outsiders (Panagariya and Findlay, 1996). There is also the view that in customs unions, because of the harmonization of external trade policies, CU members could exploit their joint market power in world markets, leading to higher external tariffs (Bond and Syropoulos, 1996). Cadot, De Melo and Olarreaga (21) show that in a political economy setting where tariffs and duty drawbacks are endogenously chosen through industry lobbying, full duty drawbacks are granted to exporters that use imported intermediate goods in their production. This in turn decreases their incentives to counterlobby against high tariffs on their inputs. Under a full duty drawback regime, tariffs on intermediate goods are irrelevant to exporters because they are fully rebated. In equilibrium, higher tariffs will be observed on these goods. However the creation of a regional trading bloc alters the incentives by eliminating duty drawbacks on intraregional exports, which leads to lower tariffs for goods that intraregional exporters use as inputs. They find evidence from MERCOSUR that the elimination of duty drawbacks for intra-regional exports leads to increased counter lobbying against protection of intermediated goods and without this mechanism the common external tariff would have been on average higher. The increased segmentation of production in tasks, located in different geographic areas through the rise of Global Value Chains can indeed impact on the interface between regionalism and multilateralism. For his part Limao (27) shows that when RTAs embrace non-trade objectives, they can become stumbling blocs to multilateralism since lower external tariffs erode preferences and reduce incentives among members to engage in cooperation in nontrade areas. At an empirical level, Estevadeordal, Freund and Ornelas (28) explored the interface between regionalism and multilateralism in the context of 1 Latin American countries over the period Using data on preferential and most-favored-nation (MFN) applied tariffs, based on 1 ISIC 4-digit industries, they investigated whether sectors that had relatively large preferences have been liberalized or protected to the same extent as other sectors and whether these effects differ by type of RTA, free trade areas (FTAs) or customs unions (CUs). Their results lent credence to the view that regionalism is a building bloc for multilateralism. There was no clear evidence from their empirical investigations that trade preferences lead to higher tariffs; on the contrary they found strong evidence that preferences induced a faster decline in external tariffs in free trade areas. Empirical research on the interface between regionalism and multilateralism based on the experiences of developing countries have not been abundant of late and in the case of African RECs remain to the best of our knowledge limited if not inexistent. The study by Foroutan dated from 1998 remains a classic in the empirical literature on the interface between regionalism and multilateralism in developing countries even though the study did not support the existence of a causal link between the two phenomena. Her study showed that the Latin American countries that were members of an effective regional arrangement had liberalized their trade regimes the most while the Middle East and Northern African countries had implemented the least amount of trade liberalisation. Her study noted that the average rate of protection in Sub-Saharan African had remained high at around 22 per cent with little difference between those countries classified as belonging to an effective RTA and those that were not. The study found that 22