Regional Integration in South-South Trade Agreements: the case of ...

Regional Integration in South-South Trade Agreements: the case of Uganda and Kenya in the EAC Linda Calabrese, MSc

1. Introduction Regional integration agreements (RIAs)1 generate welfare changes affecting the various actors in different ways. Studies have usually focused on trade creation and diversion generated by the adhesion to a trade bloc but there are other issues such as increased competition, agglomeration due to economies of scale and so on. The general analysis of gains and losses will establish which stakeholders gained and which ones lost in the transition to the trade bloc. The recent increase2 in regional arrangements around the globe (especially when compared with multilateral agreements as analysed by Baldwin, 1995) is accompanied by an upsurge in SouthSouth trade agreements. The creation of RIAs between developing (or “South”) countries has been supported with many issues ranging from increased self-reliance to asymmetries in distribution of gains to the avoidance of the increasing level of technical barriers to trade imposed by developed countries (for a complete review, see Greenaway & Milner, 1990). Venables (1999) argues that economic integration among developing countries leads to divergence, as the lowest income members will be most likely to incur in real income loss caused by trade diversion. Venables also emphasises that concentration of economic activities, agglomeration and specialisation are most likely to occur in those RIAs formed among developing countries thus increasing the gaps. Venables therefore concludes that developing countries benefit more from North-South arrangements than from South-South arrangements as in the former they will be able to benefit from trade creation. Uganda forms the East African Community (EAC) together with Burundi, Kenya, Rwanda and the United Republic of Tanzania. The EAC Customs Union was introduced in 2005 as a way of enhancing trade and competitiveness. Uganda, a landlocked country heavily dependent on imports from/through Kenya,3 envisaged considerable benefits deriving from the Customs Union. The EAC Common Market, launched in 2010, entails free movement of goods, people and labour, services and capital. 1

There are different types of Regional Integration Agreements, which can range from the creation of a simple free trade area to complete integration of the economic systems to political integration. 2 According to the WTO, 319 agreements were in force at the beginning of 2012 (World Trade Organization, 2012), compared to 170 in 2005 (Crawford & Fiorentino, 2005). 3 Most goods going to and leaving from Uganda pass through the port of Mombasa. Moreover, Kenya is also an important source of imports for Uganda: in 2011, 11.4% of Uganda imports originated from Kenya (International Trade Centre, 2012). Regional Integration in South-South Trade Agreements Linda CALABRESE

Page 1

This paper aims at testing the hypothesis on trade creation and diversion presented in Venables (1999) on the EAC. The EAC is an interesting case study as the first Community failed because of the excessive imbalances among Partner States, inter alia (Venables, 1999). The focus of analysis will be on Uganda and Kenya as the poorest and richest country respectively (before the inclusion of Rwanda and Burundi) and therefore the best to test Venables’ hypothesis. This paper will show that in the EAC there is weak evidence of the trade creation and trade diversion as theorized by Venables. The paper is organised as follows. First Venables’ theory is explained and applied to Kenya and Uganda in the current EAC by examining trade data and macroeconomic variables. An interpretation of the data is offered, alongside with possible explanations. Finally, some conclusions are drawn on Venables’ theory in the case of the EAC.

2. Venables’ theory on convergence in regional trade agreements The effects of the creation of free trade agreements 4 are generally analysed in terms of trade creation and diversion.5 When entering a free trade agreement, countries might change the suppliers of their goods. Trade creation takes place when a country has access to cheaper products from one of the countries in the bloc as compared to the previous situation. On the contrary, trade diversion happens when imports from an intrabloc country become cheaper than imports from a third trade partner because of the introduction of a common tariff.6 In his famous paper “Regional Integration Agreements: a Force for Convergence or Divergence?” (1999), Venables interrogates himself over the effects of regional integration on countries’ income. He argues that South-South trade agreements lead to income divergence among member states, whereas North-South trade agreements can generate convergence. For the latter, he uses the example of the European Union, in which convergence has taken place among member countries, and compares this with other regional integration experiences, especially in Africa. He makes the example of the first East African Community, a case in which divergence between the strongest country (Kenya) and the others (Tanzania 7 and Uganda) eventually led to a collapse of the Community.8 Venables’ theory is based on two main points. First, he argues that a country’s comparative advantage influences its gains and losses deriving from the regional integration process. He 4

The benefits of free trade agreements are usually summarized as follows: i) gains from trade associated with specialization; ii) increasing returns to scale; iii) increased competition and consequent decrease of monopolies; iv) possible influence on terms of trade with the rest of the world and attainment of a common optimum tariff. There is an important debate on the different effects of unilateral liberalisation and trade agreements. 5 As first described by Viner (1950). 6 Trade creation is considered to be welfare-increasing, whereas trade diversion is welfare-reducing. However, these conclusions are based on particular assumptions such as the absence of substitution in consumption and the linearity of the production possibility curve. For a complete analysis, refer to Markusen et al.(1995). 7 Tanganyika and Zanzibar joined together forming the United Republic of Tanzania in 1964. 8 In 1919, when Kenya, Tanganyika and Uganda formed a Customs Union. The first EAC was founded in 1967. The Community collapsed in 1977 due to economic and political factors. Among these, the most important were the failure to promotes sustained economic growth, the economic losses due to trade diversion and the lack of redistribution mechanisms and the imbalance among Partner States, as Kenya had strong dominance over the other countries (for a review of the economic reason, see Khorana et al.(2009); for a review of the political issues, see Potholm (1979) among others). Regional Integration in South-South Trade Agreements Linda CALABRESE

Page 2

considers two economies with a comparative disadvantage in manufacture relative to the rest of the world. One these two countries will have a bigger disadvantage compared to the other. 9 For instance, it can be assumed that both countries have some manufacturing that is inefficient and survives because of the presence of tariffs, but country A is more efficient than country B. If countries A and B enter a free trade agreement, following the theory of comparative advantage, country A will increase its specialisation in manufacturing and will draw part of the production out of country B. In this way, country A will move further away from its comparative advantage (which is in agriculture), whereas country B will move closer to it. This shift in trading patterns will generate trade diversion, as country B will buy some of its industrial goods from country A which is less efficient at industrial production. The effect of trade diversion will benefit country A but not country B, thus creating divergence between the two. Such changes are not offset by dynamics like for instance, changes in agricultural trade patterns. In fact, it is likely that country B will expand its agricultural production in accordance with its comparative advantage – therefore trade diversion will not arise. In summary, country A will benefit from both increased export of industrial goods and increased import of agricultural goods, whereas country B will both benefit and lose from the process. This is the origin of divergence between the two countries. As Venables put it, “a country suffers a lot of trade diversion if its partner has comparative advantage which comes between it and the rest of the world” (1999, p. 5). The second point made by Venables entails geographical factors. According to economic geography, dynamics of cumulative causation lead to agglomeration of economic activities, thus increasing the advantages of “first movers”. Clustering of economic activities is the result of “centrifugal” and “centripetal” forces pushing such activities in opposite directions.10 Venables is interested in the effects of regional integration on the balance between centrifugal and centripetal forces. The reduction of trade barriers induces agglomeration as it allows increases in exports and therefore concentration of economic activities. Concentration might happen at a sectoral level, as in the case of Europe. This might have considerable relocation costs but does not necessarily entail increased inequality, as each area might specialise in a sector and attract a specific production. Alternatively, the whole manufacturing sector could relocate to some selected areas, leaving the rest of the region “deindustrialised”. This will have considerable distributive effects, decreasing the welfare of the deindustrialised areas. According to Venables, if manufacturing constitutes a small share of the economy and if linkages are broad and cut across many sectors (in other words, if an industry is not “tied” to a specific location) reallocation of the whole industrial sector might take place. These conditions are more likely to take place in early stages of development, where a country's basic industrial infrastructure is less developed. Therefore, the welfare-reducing agglomeration caused by the creation of a free trade area is more likely to take place in developing countries. The two processes described above can interact with each other in a sort of cumulative causation, thus accelerating the divergence processes. The next paragraph will analyse the first dynamic 9

The comparative disadvantage of countries A and B could be due to many factors: differences in technology, geography, institutions and others. 10 “Centripetal” forces which pull activities together are usually classified in three groups: i) knowledge spillovers or other beneficial technological externalities; ii) labour market pooling effects, which encourage firms to locate where they can benefit from readily available labour skills; and iii) linkages between buyers and sellers. “Centrifugal” forces which encourage the dispersion of activities include congestion, pollution, or other externalities (Marshall 1920). Regional Integration in South-South Trade Agreements Linda CALABRESE

Page 3

described by Venables to ascertain its presence in relation to the Kenyan and Ugandan economy in the East African Community.

3. Methodology and scope of work For the analysis conducted in this paper, secondary data deriving from major international databases will be used. Such data tend to be more uniform and harmonised than the government datasets.11 As for the processes described by Venables, only the dynamics of trade creation and trade diversion will be analysed. The processes of agglomeration will not be dealt with in this paper for two main reasons. First, such processes take place on long time spans as they entail relocation of economic activities, creation of pools of skilled labour and so on. It might be too early to assess the effect of these dynamics in the EAC. Secondly, the scarcity of data on these might hamper the analysis. 12 As a consequence of what just stated, this paper will note attempt at assessing the welfare effects of regional integration in the EAC. Trade creation and trade diversion will be the scope of the present analysis. Despite the fact that the actual process of economic integration in the EAC aims at liberalising the movement of all factors, this paper will only focus on trade in goods for two main reasons. First, the Common Market has been in place for only two years and its implementation has been gradual, therefore it might be early to assess its impact. Secondly, data regarding East Africa are scanty and/or not readily available. There might not be ground to assess the effects of the movement of factors. Trade in services will not be included in the present analysis. Movement of goods, on the other hand, has been liberalised in 2005, and a larger set of data is available thus allowing to draw some interesting conclusions.

4. Comparative advantage and disadvantage in Kenya and Uganda Kenya and Uganda in the context of the EAC can be used to test Venables’ theory.13 Uganda and Kenya are members of the current EAC,14 created in 2000 with Tanzania, whereas Burundi and Rwanda joined in 2007.15 The EAC entails four stages of integration: a Customs Union, a Common Market, a Monetary Union and ultimately a Political Federation. The EAC Customs Union was introduced in 2005 as a way of enhancing trade and competitiveness in Uganda, 16 a landlocked

11

An example of the inconsistencies of national datasets with reference to Kenya is provided in Ng & Yeats (2005). For instance, the most recent complete analysis on the labour market in Uganda (the manpower survey) was undertaken in 1989. 13 It is interesting to note that Venables’ paper uses Kenya and Uganda as examples to illustrate its theory. 14 The first attempts to integration in East Africa date back to the early 20 th century. The first East African Community was established in 1967 but collapsed in 1977 due to political and economic reasons (East African Community, 2011b). 15 The new EAC Treaty was designed to address the imbalances that led to the dissolution of the first EAC. In particular, Tanzania’s and Uganda’s less competitive industries were meant to be temporarily sheltered from their Kenyan counterparts. 16 The Customs Union guarantees free movement of goods in the region by eliminating internal import tariffs and establishing a Common External Tariff to be applied to all imports from outside the region. 12

Regional Integration in South-South Trade Agreements Linda CALABRESE

Page 4

country whose access to international markets heavily depends on Kenya.17 Kenya dominates over Uganda in most aspects, It has larger population and stronger economy compared to its landlocked neighbour. Kenya also has a larger manufacturing and industrial sector. Although the share of agriculture in the GDP is the same, Kenya’s agricultural sector is larger and more modern than that of Uganda.18 Table 1 summarises the main features of the two economies. Table 1: Selected indicators for Kenya and Uganda, 2011 (World Bank, 2012). Indicator Population (million) Population growth rate Urban population (% of total) Urban population growth GDP (million USD) GDP per capita (USD) Industry and manufacturing (share of GDP) Agriculture (share of GDP) Trade (share of GDP)

Kenya 41 2.7% 24.0 4.4% 33 808 40% 23% 73%

Uganda 33 3.2% 15.6 5.9% 16 487 33% 23% 58%

In the period 2000-2005, trade in goods and services increased in Uganda.19 Total imports grew from 950 million USD in 2000 to 1760 million in 2005 (United Nations Conference on Trade and Development, 2012). This was largely due to a considerable increase in the purchase of finished products. Most of Uganda’s imports were coming from Kenya (over 25% in 2005; Khorana, et al., 2009). Exports from Uganda increased from 450 million USD in 2000 to 1015 millions in 2005 (United Nations Conference on Trade and Development, 2012). As imports grew more than exports, the trade deficit dramatically increased, as shown in Errore. L'origine riferimento non è stata trovata..20

17

Most goods going to and leaving from Uganda pass through the port of Mombasa. Moreover, Kenya is also an important source of imports for Uganda: in 2011, 11.4% of Uganda imports originated from Kenya; International Trade Centre, 2012). 18 Kenya is famous for its developed horticulture. For more information on this topic, see English et al. (2004). 1919 Uganda’s exports statistics include good imported for re-export. The export of locally produced goods is therefore only a share of the total export value. For instance, in 2010 re-exports constituted almost 30% of total exports (Uganda Bureau of Statistics 2012). Almost all of Uganda’s re-exports are non-traditional products (ibid.). 20 The trade deficit is Uganda has been funded with “foreign savings from a variety of sources; workers’ remittances, foreign aid and net capital inflows” (Tumusiime-Mutebile, 2012, p. 3) Regional Integration in South-South Trade Agreements Linda CALABRESE

Page 5

Figure 1: Uganda Trade Balance, million USD (United Nations Conference on Trade and Development, 2012).

Trade Balance, million USD

500 0 -500 -1000 -1500 -2000 -2500 -3000

The main market for Uganda’s exports was Europe: more than 40% of the goods exported from Uganda landed on European markets (Khorana, et al., 2009). In Africa, Uganda mostly exported to Kenya (Khorana, et al., 2009). Exports were mostly agricultural and primary products, including coffee and tea (224 million USD), fish products (140 million USD), gold (73 million USD) and cotton (40 million USD). Uganda’s main imports for the same period were petroleum products, vehicles, cereals, iron and steel products. In the period 2000-2004, trade in goods and services increased in Kenya. Total imports grew from 2900 million USD in 2000 to 4600 million in 2004 (United Nations Conference on Trade and Development, 2012). 26% of imports were originating from Europe, 11% from United Arab Emirates (and only 6% from India and 3% from China; United Nations Conference on Trade and Development, 2012). Main imports in 2004 were petroleum oils and machinery and transport equipment (both at 24%), chemicals (15%) and manufactured goods (14%; United Nations Conference on Trade and Development, 2012). Exports from Kenya dramatically increased from 1570 million USD in 2000 to almost 2700 millions in 2004 (United Nations Conference on Trade and Development, 2012). In 2004, Kenya mainly exported agricultural products (37%), minerals (23%) and raw materials (16%; United Nations Conference on Trade and Development, 2012). Four countries were the main destination for these exports: Uganda (18%), United Kingdom (11%), the Netherlands and Tanzania (8% each; United Nations Conference on Trade and Development, 2012). The analysis of trade flows show that both Kenya and Uganda export mostly primary products and import manufactured goods and inputs. However, Uganda’s economy relies more on the primary sector and on trade with Kenya, which exports manufactured goods to Uganda. From this it can be inferred that both Kenya and Uganda have a comparative advantage in agriculture and a disadvantage in manufacturing compared to the rest of the world. However, Uganda’s advantage is stronger whereas Kenya is closer to the world average. Therefore, Kenya and Uganda in the context of the EAC can be used to test Venables’ theory.21 21

Comparative advantage can be calculated in different ways. One of the most common is the Balassa index as illustrated in Balassa (1965). However, this exercise is beyond the scope of this paper. Regional Integration in South-South Trade Agreements Linda CALABRESE

Page 6

5. Convergence and divergence in regional integration agreements: the case of Kenya and Uganda During the 1990s, Uganda liberalised and simplified its tariff regimes. However, the creation of the EAC Customs Union in 2005 caused a change in trade patterns. The CET introduced three tariff rates: 25% for raw materials, 10% for intermediate products and 0% for finished products. Khorana et al (2009) assess the change generated by the new tariff system. They state that the average tariffs are relatively high under the CET, especially for agricultural goods (19.7% on average), dairy products, grains and tobacco. However, under the EAC customs regime tariffs are lower for electrical components and machinery. In general, the introduction of CET has raised average tariff for all member states. How has the creation of the EAC Customs Union influenced trade patterns in the region? The analysis of recent trade data can shed some light on this. This paragraph will examine the changes in trade using the most recent data, from 2007 onwards.22

5.1.Changes in Uganda’s trade patterns Total Ugandan imports increased from 3500 million USD in 2007 to more than 5600 million USD in 2011. The increase is mainly due to an upsurge in expenses for energy and finished products (International Trade Centre, 2012). Kenya is one of the main sources for these inputs (after India). Imports from China are also growing in importance. However, the most evident trend is the increase in import from India, against which Kenya is losing ground as an exporter to the Ugandan market. Table 2: Uganda's imports by country of origin, million USD (International Trade Centre, 2012).

2007 World 3493 India 345 Kenya 472 China 274

% total

2008 4526 9.9% 470 13.5% 511 7.8% 366

% total 10.4% 11.3% 8.1%

2009 4247 521 503 379

% total

2010 4664 12.3% 684 11.8% 512 8.9% 415

% total

2011 5631 14.7% 928 11.0% 645 8.9% 522

% total 16.5% 11.4% 9.3%

In terms of products, the most recent data confirm Uganda as an importer of minerals and oils, electronic equipment, vehicles and machinery (International Trade Centre, 2012). Around 22% of the total imports are constituted by petroleum oils (see Appendix II for further information). In terms of exports, Uganda mainly exports to countries in the region. Exports to Sudan (especially South Sudan), Rwanda and DRC are spurred by the fact that the commercial routes to these countries pass through Uganda. Therefore, most of these products might be re-exports rather than internally produced goods.

Table 3: Uganda's main export, million USD (International Trade Centre, 2012).

2007

% total

2008

% total

2009

% total

2010

% total

2011 % total

22

The choice of the time period depends both on analytical and practical reasons. On the analytical side, 2007-2011 is a good time span to analyse the changes in trade patterns that took place after the creation of the Customs Union (2005). On the practical side, dataset for these years were available at a good level of detail, thus allowing a thorough analysis. Regional Integration in South-South Trade Agreements Linda CALABRESE

Page 7

World Sudan Kenya Rwanda DR Congo

1337 157 118 83 100

11,8% 8,8% 6,2% 7,5%

1724 246 165 137 125

1568 185 174 135 157

14,3% 9,5% 7,9% 7,2%

11,8% 11,1% 8,6% 10,0%

1619 209 190 149 184

12,9% 11,8% 9,2% 11,4%

2159 329 15,2% 227 10,5% 194 9,0% 182 8,4%

Uganda heavily relies on primary products to earn foreign currency. Its main exports are coffee and tea (more than 25% of total exports), electrical equipment, fish and fish products, mineral products (International Trade Centre, 2012). Uganda’s exports to Kenya are mainly constituted by agricultural products, the main being coffee, tea and mate (32%), vegetables (8%) cereals (7%) and dairy products and eggs (6%) (International Trade Centre, 2012). 5.2.Changes in Kenya’s trade patterns The case for Kenya is quite different. Kenya mainly imports from the United Arab Emirates, India, China and South Africa. Uganda does not appear among the most important exporters to Kenya. Table 4: Kenya's imports by country of origin, million USD (International Trade Centre, 2012).

World UAE India China South Africa

2007 8989 1329 845 679 525

% total 14.8% 9.4% 7.6% 5.8%

2008 11128 1656 1310 932 678

% total 14.9% 11.8% 8.4% 6.1%

2009 10202 1162 1078 965 914

% total 11.4% 10.6% 9.5% 9.0%

2010 12093 1463 1302 1523 754

% total

2011 15028 2281 1714 1638 818

12.1% 10.8% 12.6% 6.2%

% total 15.2% 11.4% 10.9% 5.4%

Kenya’s imports are also heavily biased on industrial products: oil (27% of total imports), machinery (10%), electrical equipment (7%) and vehicles (6%). However all these products are imported from the major trading partners, whereas Kenya only imports primary products from Uganda, as shown above. Table 5: Kenya's exports by country of destination, million USD (International Trade Centre, 2012).

2007 World Uganda UK Tanzania

4081 499 428 332

% total 12,2% 10,5% 8,1%

2008 5001 615 551 425

% total

2009

12,3% 11,0% 8,5%

4463 598 498 389

% total 13,4% 11,2% 8,7%

2010 5169 657 507 420

% total 12,7% 9,8% 8,1%

2011 5853 873 536 476

% total 14,9% 9,2% 8,1%

In terms of exports, the main market for Kenya’s products is Uganda. 23 The trend has been constantly growing: since the inception of the EAC, Kenya has increased its exports to Uganda. Kenya mostly exports primary products to European countries (coffee and tea constitute 24% of the country’s total exports, followed by live trees and plants and cereals) and oil to Uganda. 23

This is partly due to the fact that the port of Mombasa is one of the main destinations for goods shipped to the region. Uganda happens to be on the trade corridor for many landlocked countries such as Rwanda and DRC. Regional Integration in South-South Trade Agreements Linda CALABRESE

Page 8

In summary, this paragraph has shown that Kenya’s export to Uganda have increased since the beginning of the Customs Union (though other exporters are becoming more important suppliers for Uganda). A more in-depth analysis of the trade flows taking place between Kenya and Uganda yields interesting results. Figure 2 provides a graphic illustration of export trends for some selected primary products.24 The graph shows that in the period under analysis Kenya’s export of primary products to Uganda has decreased or stagnated, in compliance with Venables’ theory. Before 2005, export trends appeared to be very volatile. After the launch of the Customs Union, they became more stable and generally decreased compared to the previous period.

Figure 2: Export of selected primary products as a ratio of total exports of goods from Kenya to Uganda (UN Comtrade, 2012). 14,0% Dairy products and eggs 12,0%

Cereals and cereal preparations Vegetables and fruit

10,0% 8,0%

Sugar, sugar preparation and honey Coffee, tea, cocoa, spices Misc. Food products

6,0% 4,0%

Crude fertilizer/mineral

2,0%

Iron and steel

0,0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 3 shows the trends of Kenya’s export of manufactures to Uganda. As for primary products, the export figures were very volatile before 2005 and stabilised after that date. However, exports of manufactures seem to stagnate: they do not grow as much as one would expect from Venables’ hypothesis. It should be noted that other factors might be influencing these trends. For instance, it has been shown that Uganda is importing more and more from India and China. These two countries are replacing Kenya as major source of Uganda’s imports. These new dynamics are certainly influencing Uganda’s trade relationship with Kenya.

24

The graph only shows the main exported primary products. Petroleum products are not included since their trend is very volatile and depends on a large number of factors that go beyond the scope of the present analysis. However, including petroleum products does not change the results, since the overall export trend has been decreasing. Regional Integration in South-South Trade Agreements Linda CALABRESE

Page 9

Figure 3: Export of selected manufactures as a ratio of total exports of goods from Kenya to Uganda (UN Comtrade,

2012). 16,0% 14,0% 12,0% 10,0% 8,0% 6,0% 4,0% 2,0% 0,0% 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Beverages

Organic chemicals

Inorganic chemicals

Dyeing/tanning/color mat

Pharmaceutical products

Perfume/cosmetic

Manufactured fertilizers

Plastics in primary form

Paper/paperboard

Textile yarn/fabric

Non-ferrous metals

Metal manufactures NES

Industry special machinery

Office processing machines

Electrical equipment

Road vehicles

Misc. Manufactures NES

2010

The analysis of Uganda’s exports to Kenya also yields interesting results. As seen for the previous years, most of the products exported from Uganda to Kenya are agricultural products. For most of these products, there has been a marked increase in export during the short period under consideration. The graphic illustration provided in Figure 4 clearly shows that exports of primary products from Uganda to Kenya generally experienced a steep increase in 2005, coincidentally with the launch of the Customs Union, and an overall increase in the 2005-2010 period, in compliance with Venables’ theory. This trend is much more noticeable than in the case of Kenya’s export to Uganda. This might be due to the fact that Kenya’s exports entail much larger figures and a bigger number of trading partners, therefore other factors might influence the trends. Here, as Kenya clearly dominates as recipient of Uganda’s exports, the trend is very noticeable despite the short time span.


Page 10

Figure 4: Uganda’s export to Kenya as a share of total export of goods, selected primary products (UN Comtrade 2012). 35,0% 30,0% 25,0% 20,0% 15,0% 10,0% 5,0% 0,0% 2000

2001

2002

2003

2004

2005

2006

2007

Dairy products and eggs

Fish/shellfish

Cereals and cereal preparations

Vegetables and fruit

Animal feed

Oil seeds/oil fruits

Iron and steel

Tobacco

2008

2009

2010

Figure 5 shows the changes in exports of manufactures from Uganda to Kenya. Almost all products (excluding textile fibres) experienced an increase in exports after the launch of the Customs Union. This is in contradiction with Venables’ hypothesis.

Figure 5: Uganda’s export to Kenya as a share of total export of goods, selected manufactures (UN Comtrade 2012).

7,0% 6,0% Textile fibres

5,0%

Animal/Veg oils 4,0%

Cork/wood manufactures Paper/paperboard

3,0%

Textile yarn/fabric 2,0%

Metal manufactures NES

1,0%

Misc. Manufactures NES

0,0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


Page 11

In conclusion, the effects of trade creation and trade diversion forecasted by Venables can only be partly observed in the trade relationship between Uganda and Kenya in the EAC. In terms of primary products, Uganda’s exports to Kenya increased whereas Kenya’s export to Uganda remained stable, in compliance with Venables’ hypothesis. As for manufactures, however, Kenya’s export to Uganda did not experience a considerable change, whereas Uganda’s export to Kenya slightly increased. Several factors could have hampered the effects described by Venables. These include: i.

ii.

iii.

iv.

v.

vi.

vii.

25

The incompleteness of the EAC Customs Union. The free movement of goods that should be granted by the Customs Union (and by the Common Market) is not fully operational. The movement of goods is hampered by the presence of Non-Tariff Barriers such as lack of harmonized standards, presence of excessive bureaucracy, poor infrastructures that cause delays in transport of goods and so on. Other dynamics taking place at the global level. It has been shown how India and China are gaining more space in the East African market, slowly replacing Kenya as major source of imports for Uganda. This can influence the overall trade dynamics between Kenya and Uganda. The period under consideration. The EAC Customs Union has been created recently. However, such considerable institutional changes take time to show their effects. The impact the Customs Union has on trade patterns and ultimately on the welfare of EAC citizens will probably become clear in a few years. The (temporary) lack of agglomeration phenomena. The analysis of concentration of economic activities as a result of regional integration has been left out of this paper. However, the author recognizes the importance of such phenomenon and the effects it can have on trade patterns. Relocation and agglomeration of economic activities takes time. The few years that have passed since the creation of the Customs Union might not have been enough to allow the effects of agglomeration to clearly show in the analysis. The lack of agglomeration phenomena. As Mayda and Steinberg (2006) suggest, the small economic dimension of the countries under examination might hinder agglomeration of economic activities. The size of developing countries’ markets might not be enough to trigger the creation of economies of scale. The quality of data. Data constitute one of the main problems for analysis concerning Africa. The data available for the present study covered only a limited period of time. Therefore, it might not have been possible to fully appreciate the extent of the phenomenon. The available data might also not be very reliable. For instance, Uganda includes estimated informal trade data in its statistics.25 The size of flows under consideration. It has been shown, for instance, that Uganda is exporting more manufactures to Kenya since the launch of the Customs Union, whereas its imports from Kenya stagnated. This, however, might be due to the fact that Uganda exports a very small amount of manufactures to Kenya compared to its imports. Therefore, a small change in the export flow might look considerably bigger than a change of the same amount in the import, which in turn looks smaller because of relative sizes.

For more detailed information, see Bank of Uganda, Uganda Bureau of Statistics (Various Years).


Page 12

6. Concluding remarks Venables (1999) argues that regional integration agreements among countries that have a comparative disadvantage in one sector will eventually lead to divergence among those countries. In particular, he argues that in case of agreements among developing countries (South-South agreements) divergence will arise through two mechanisms: i) trade diversion will damage the country with the most extreme comparative disadvantage (in case of South-South agreements, that is generally the poorest country) and trade creation will not suffice to offset the losses; and ii) agglomeration forces will lead to deindustrialisation of the poorest country. This paper aimed at testing Venables’ hypothesis of trade creation and trade diversion. Kenya and Uganda in the context of the EAC were found to be appropriate for the study. The comparison of data trade patterns before and after the creation of the EAC Customs Union found weak evidence for the trade diversion forecasted by Venables (Kenya’s export of manufactures to Uganda increased slowly and at an uncertain pace) and strong evidence for trade creation (Uganda exported more agricultural products to Kenya). The final result of the analysis can be influenced by several factors, such as the lack of adequate date, the fact that the Customs Union is very recent and the presence of other global dynamics impacting on the process. Dynamics à la Venables can have considerable economic and political effects. If they take place, Kenya will further consolidate its leadership position in the EAC. The disproportionate power of Kenya was one of the reasons that led to the collapse of the first East African Community. Therefore, in order to avoid a similar outcome for the present EAC, balancing mechanisms need to be put in place. Moreover, strategic considerations need to be taken into account. Increasing its exports to the EAC is positive for Uganda. However, terms of trade for commodities have historically shown tendency to decline when compared with prices of manufactures and industrial products. Therefore, if Uganda focuses on the production and export of primary products with little value added, potential benefits of an export-led growth might remain untapped. The welfare effects of the process described by Venables have a considerable importance. Has the change in trade patterns improved the welfare of EAC citizens? And of which groups of citizens? Have agglomeration phenomena led to remarkable divergence? And how can this be offset? All these questions still need an answer. Many sources confirm the scarce success of regional integration process in creating convergence among Sub-Saharan countries (Foroutan, 1992). Future research should therefore concentrate on two main issues: the analysis of agglomeration phenomena (see for instance the recent study by Sanguinetti, et al., 2010) and the welfare effects of regional trade arrangements. Together with the analysis of trade creation and trade diversion, these two strands of research can offer interesting insights on regional integration.


Page 13

7. References EAST AFRICAN COMMUNITY, 2012. EAC Common Market: Benefits. [Online] Available at: http://www.commonmarket.eac.int/benefits.html [Accessed 12 Agosto 2012]. BALASSA, B., 1965. Trade Liberalisation and “Revealed” Comparative Advantage. The Manchester School, 33(2), pp. 99-123. BALASSA, B., 1977. 'Revealed' Comparative Advantage Revisited: An Analysis of Relative Export Shares of the Industrial Countries, 1953-1971. The Manchester School of Economic & Social Studies,, 45(4), pp. 327-344. BALDWIN, R. E., 1995. What Caused the Resurgence of Regionalism. Swiss Journal of Economics and Statistics, 131(3), pp. 453-463. BANK

UGANDA, Uganda Bureau of Statistics, Various Years. Informal Cross Border Trade Report.

OF

CRAWFORD, J.-A. & FIORENTINO, R. V., 2005. The Changing Landscape of Regional Trade Agreements, Geneva: World Trade Organization. EAST AFRICAN COMMUNITY SECRETARIAT, 2011. EAC Facts and Figures, Arusha. EAST AFRICAN COMMUNITY, 2011a. EAC Customs Union - An Overview. [Online] Available at: http://www.customs.eac.int/index.php?option=com_content&view=article&id=123&Itemid =78 [Accessed August 21, 2012]. EAST

AFRICAN COMMUNITY, 2011b. History of the EAC. [Online] Available http://www.eac.int/index.php?option=com_content&view=article&id=44&Itemid=54 [Accessed August 21, 2012].

at:

ENGLISH, P., JAFFEE, S. & OKELLO, J., 2004. Exporting Out of Africa—Kenya’s Horticulture Success Story. Shanghai. FOROUTAN, F., 1992. Regional Integration in Sub-Saharan Africa. World Bank Policy Resarch Working Papers1, Issue WPS 992. GREENAWAY, D. & MILNER, C., 1990. South-South Trade: Theory, Evidence and Policy. The World Bank Research Observer, 5(1), pp. 47-68. INTERNATIONAL TRADE CENTRE, 2012. Trademap. [Online] Available at: www.trademap.org KHORANA, S., KIMBUGWE, K. & PERDIKIS, N., 2009. Assessing the Welfare Effects of the East African Community Customs Union's Transition Arrangements on Uganda. Journal of Economic Integration, December, 24(4), pp. 685-708. KIGUTA, P. N., 2012. Investment and Trade in the EAC - Progress and Priorities. Arusha, EAC Secretariat. MARKUSEN, J. R., ET AL., 1995. International Trade: Theory and Evidence. New York: McGrawHill. MAYDA, A. M. & STEINBERG, C., 2006. Do South-South Trade Agreements Increase Trade? Commodity-Level Evidence from COMESA, Washington D.C.: International Monetary Fund. MEYER, N., ET AL., 2010. Bilateral and Regional Trade Agreements and Technical Barriers to trade: An African Perspective. OECD Trade Policy Working Papers. MUGOMBA, A. T., 1978. Regional Organisations and African Underdevelopment: The Collapse of the East African Community. The Journal of Modern African Studies, 16(2), pp. 261-272. Regional Integration in South-South Trade Agreements Linda CALABRESE

Page 14

NG, F. & YEATS, A., 2005. Kenya: Exports Prospects and Problems, Washington D.C.: The World Bank. OKKO, P., 2003. Regional growth and convergence via integration – the case of the large EU. ERSA Conference Paper, Issue 445. POTHOLM, C. P., 1979. Who Killed Cock Robin? Perceptions Concerning the Breakup of the East African Community. World Affairs, 142(1), pp. 45-56. SANGUINETTI, P., SIEDSCHLAG, I. & VOLPE MARTINCUS, C., 2010. The Impact of South-South Preferential Trade Agreements on Industrial Development: An Empirical Test. Journal of Economic Integration, 25(1), pp. 69-103. SCHIFF, M. W. & WINTERS, L. A., 2002. Regional Integration and Development. New York: Oxford University Press. SEBALU, P., 1972. The East African Community. Journal of African Law, 16(3), pp. 345-363. TUMUSIIME-MUTEBILE, E., 2012. Macroeconomic Management in Turbulent Times. [Online] Available at: http://www.bou.or.ug/export/sites/default/bou/boudownloads/speeches/GovernorsSpeeches/2012/Jan/Presentation_By_Prof._E._TumusiimeMutebilex_Governorx_Bank_Of_Ugandax_To_The_NRM_Retreatx_Kyankwanzix_Januar y_19x_2012.pdf [Accessed September 20, 2012]. UGANDA NATIONAL BUREAU OF STATISTICS, 2012. Statistical Abstract. Kampala. UNITED NATIONS, 2012. UN Comtrade. [Online]. UNITED NATIONS CONFERENCE ON TRADE Available at: unctadstat.unctad.org

AND

DEVELOPMENT, 2012. UNCTADSTAT. [Online]

VELDE, D. W., 2011. Regional Integration, Growth and Convergence. Journal of Economic Integration, 26(1), pp. 1-28. VENABLES, A. J., 1999. Regional Integration Agreements: A Force for Convergence or Divergence?. World Bank Policy Research Working Papers, Issue WPS2260. VINER, J., 1950. The Customs Union issue. New York: Carnegie Endowment for International Peace. WEEKS, S. G., 1967. The East African Community. Africa Today, 14(5), pp. 2-3. WORLD BANK, 2012. World Development Indicators, Washington D.C.: The World Bank. WORLD TRADE ORGANIZATION, 2012. World Trade Organization. [Online] Available at: www.wto.org . YANG, Y. & GUPTA, S., 2005. Regional Trade Arrangements in Africa: Past Performance and the Way Forward. IMF Working Papers.


Page 15

Appendix I: Uganda’s main imports, million USD (International Trade Centre, 2012). Product label All products

Imported value in 2011 5631

Mineral fuels, oils, distillation products, etc

% of total imports 100%

1319

23.4%

Electrical, electronic equipment

532

9.5%

Vehicles other than railway, tramway

509

9.0%

Machinery, nuclear reactors, boilers, etc

486

8.6%

Iron and steel

264

4.7%

Pharmaceutical products

256

4.5%

Animal,vegetable fats and oils, cleavage products, etc Plastics and articles thereof

248

4.4%

227

4.0%

Cereals

201

3.6%

Sugars and sugar confectionery

136

2.4%

Salt, sulphur, earth, stone, plaster, lime and cement Paper and paperboard, articles of pulp, paper and board Optical, photo, technical, medical, etc apparatus Miscellaneous chemical products

133

2.4%

124

2.2%

82

1.5%

75

1.3%

Articles of iron or steel

75

1.3%

Other made textile articles, sets, worn clothing etc Beverages, spirits and vinegar

71

1.3%

62

1.1%

Rubber and articles thereof

57

1.0%

Essential oils, perfumes, cosmetics, toileteries Aircraft, spacecraft, and parts thereof

53

0.9%

52

0.9%

Organic chemicals

42

0.7%

Footwear, gaiters and the like, parts thereof

39

0.7%

Printed books, newspapers, pictures etc

38

0.7%

Furniture, lighting, signs, prefabricated buildings Soaps, lubricants, waxes, candles, modelling pastes Inorganic chemicals, precious metal compound, isotopes Aluminium and articles thereof

36

0.6%

35

0.6%

30

0.5%

30

0.5%

Articles of apparel, accessories, not knit or crochet

25

0.5%


Page 16

Appendix II: Uganda’s main exports, million USD (International Trade Centre, 2012) Product label

Exported value in 2011

All products

2159

Coffee, tea, mate and spices

548

Electrical, electronic equipment

145

Fish, crustaceans, molluscs, aquatic invertebrates nes Mineral fuels, oils, distillation products, etc

136

Animal,vegetable fats and oils, etc Salt, sulphur, earth, stone, plaster, lime and cement

101 98

124

Cotton

87

Sugars and sugar confectionery

82

Iron and steel

78

Vehicles other than railway, tramway

64

Tobacco and manufactured tobacco substitutes

55

Live trees, plants, bulbs, roots, cut flowers etc

53

Machinery, nuclear reactors, boilers, etc

52

Cocoa and cocoa preparations

45

Articles of iron or steel

41

Cereals

39

Beverages, spirits and vinegar

34

Raw hides and skins etc

33

Soaps, lubricants, waxes, candles, modelling pastes

32

Edible vegetables and certain roots and tubers

23

Oil seed, oleagic fruits, grain, seed, fruit, etc, nes

23

Plastics and articles thereof

20

Dairy products, eggs, honey etc

18

Other base metals, cermets, articles thereof

18

Cereal, flour, starch, milk preparations and products

17

Optical, photo, technical, medical, etc apparatus

15

Milling products, malt, starches, inulin, wheat gluten

14

Paper and paperboard, articles of pulp, paper and board Other made textile articles, sets, worn clothing etc

14

Residues, wastes of food industry, animal fodder

12

Furniture, lighting, signs, prefabricated buildings

10

13

Essential oils, perfumes, cosmetics, toileteries

9

Glass and glassware

8

Tanning, dyeing extracts, tannins, derivs,pigments etc Products of animal origin, nes

8

Wood and articles of wood, wood charcoal

8

Pearls, precious stones, metals, coins, etc

7


8

Page 17

Appendix III: Uganda's trade with EAC Partner States, Million USD (East African Community Secretariat, 2011). Partner Kenya

Flow

Burundi

Rest of EAC

26

2007

2008

2009

2010

72,4

184,9

204,2

271,9

276,7

284,4

Import

520,7

464,9

522,7

552,0

545,9

549,1

(448,3)

(280,0)

(318,5)

(280,1)

(269,2)

(264,7)

Export

15,4

35,3

107,6

145,3

155,6

90,9

Import

30,1

33,0

33,7

61,4

46,4

61,6

(14,7)

2,3

73,9

83,9

109,2

29,3

Export

36,1

55,6

122,4

192,1

170,2

182,2

Import

0,5

1,2

4,2

4,0

5,0

8,9

Balance

35,6

54,4

118,2

188,1

165,2

173,4

Export

20,8

20,6

42,7

45,4

63,6

59,3

Import

0,2

-

-

-

-

-

Balance

20,6

20,4

41,9

44,5

63,6

59,3

Export

144,7

296,3

476,9

654,7

666,2

616,9

Import

551,5

499,0

560,6

617,4

597,4

619,5

(406,8)

(202,7)

(83,7)

37,3

68,8

(2,7)

Balance Rwanda

2006

Export Balance

Tanzania

2005

Balance

26

It is interesting to note that the considerable improvement achieved in 2006 is a statistical phenomenon, caused by the fact that Uganda has started including informal trade in the data. Regional Integration in South-South Trade Agreements Linda CALABRESE

Page 18

Appendix IV: Kenya's trade with the EAC Partner States, Million USD (East African Community Secretariat, 2011). Partner

Flow

2005

2006

2007

2008

2009

2010

Uganda

Export

564,9

385,7

498,5

611,2

596,6

657,1

Import

18,5

13,9

88,8

75,5

57,1

116,4

Balance

546,4

371,8

409,7

535,8

539,5

540,7

Export

264,1

253,6

331,5

422,4

388,2

418,8

Import

41,0

62,6

99,2

105,0

100,8

133,0

Balance

223,1

191,0

232,3

317,4

287,4

285,8

Export

96,3

66,1

86,2

129,4

123,0

132,9

Import

1,5

2,9

1,3

0,4

3,1

5,4

Balance

94,8

63,2

84,9

129,1

119,9

127,4

Export

34,0

35,4

29,4

30,3

59,3

68,8

Import

0,4

1,2

2,2

1,5

1,2

1,8

Balance

33,6

34,2

27,2

28,8

58,1

67,0

Export

974,3

735,8

952,2

1.213,4

1.167,2

1.277,6

Import

61,5

84,1

191,6

182,0

162,2

256,6

Balance

912,8

651,6

760,6

1.031,4

1.005,1

1.021,0

Tanzania

Rwanda

Burundi

Rest of EAC


Page 19