Has the East African Community Regional Trade Agreement Created or Diverted Trade? A Gravity Model Analysis

Abstract

The paper investigates the potential impact of the EAC trade agreement (a south-south Regional grouping) on trade creation and diversion. The paper seeks to establish whether the EAC RTA has diverted or created trade using an expanded (augmented) gravity model. The paper departs from the conventional estimation approach that uses average combined trade flows as the dependent variable which is prone to errors and uses exports. We estimate static and dynamic random effects models using a panel data set from 2001 to 2011 on seventy countries that trade mainly with the EAC partner states. Results suggest that indeed the implementation of the EAC treaty has created trade contrary to widely held views that South-South RTAs largely divert trade. There is thus evidence that the EAC, a south-south RTA has been a more trade creating than trade diverting as espoused in the literature.