A WITS-SMART simulation analysis of trade creation, diversion and welfare effects of the African tripartite region

Abstract

The paper employed WITS-SMART simulations to test Jacob Viner's theory of trade creation and diversion effects in the tripartite free trade area (TFTA) signed between COMESA, EAC and SADC. Simulations used standardised 2-digit trade data. The four product classifications employed are raw materials, intermediate, consumer and capital goods whilst the economic sectors are agriculture, industrial and petroleum. Results indicated trade potential trade to be created or diverted, net trade, revenue and overall welfare effects. In total, the tripartite region will have net gains of approximately USD 2.1 trillion per annum. Specifically, the trade in the industrial sector has a 34% potential, intermediate goods 24% whilst agriculture sector will likely contribute 18% to net trade gains. Trade in raw materials and petroleum sector have the least potential contributions of 3% and 1%, respectively. The study recommends promoting the industrial sector to cater for structural changes and sync with the fourth industrial revolution.