Trade Creation and Trade Diversion Effects in ECOWAS

Abstract

This study analyzed the trade creation and trade diversion impact on ECOWAS member trade flows and estimated the impact of income per capita differences in the economic area throughout the West African Economic and Monetary Union (WAEMU). To do so, we applied the gravity model by adding the square difference in per capita income and trade creation and diversion dummy variables. The results show there is a pure effect of trade creation within the ECOWAS region, and this effect is accompanied to some extent by export diversion. Furthermore, the squared difference in per capita income between the exporting and importing countries is associated with a 0.15% increase in trade. As the coefficient is positive, this suggests that the greater the income difference between the two countries (in both directions), the greater the trade. Furthermore, the observed disparities in per capita income among ECOWAS members have been shown to encourage trade, thus indicating that policies should be oriented towards the harmonization of the economy in order to stimulate regional trade. It is imperative to acknowledge the considerable impact of income disparities, underscoring the necessity to address economic inequality to ensure the optimal realization of trade benefits within the ECOWAS region. However, relying too much on countries outside the WAEMU could lead to potential welfare losses and better integration is required.