Analysis of the Economic Partnership Agreement between the East African Community and the European Union: A Gravity Model Approach

By Geoffrey Idelphonce Mwambe
2015

This paper presents findings of the analysis of the Economic Partnership Agreement (EPA) between the East African Community (EAC) and the European Union (EU). The analysis is focused on the implications, opportunities and challenges for the EAC economies in implementing EPA. The EPAs are being negotiated to replace a non-WTO compliant trade component of the Cotonou Agreement in which the EU granted goods from the African Caribbean and Pacific (ACP) countries signed in 2000, an extension to the duty-free quota-free market access under Cotonou Agreement. The analysis was done by undertaking an evaluation of the framework Economic Partnership Agreement (EPA) between the two trade blocs, determining the potential trade impact and measuring various indices and trade creation and trade diversion effects for the EAC economies.

The analysis takes into account existence of other Free Trade Agreements (FTAs) that these blocs signed with other blocs, differences in the supply capacity and the need for these blocs to undertake deeper liberalization of their trade and economic regimes. To achieve the said goals, the study, first, undertook an analysis of trade indexes such as intraregional trade share and intraregional trade intensity indexes in order to determine the pattern, significance and share of EAC trade with the EU prior to EPA. The result shows that both indexes were weak and fluctuating and therefore would not suggest entering EPA at that stage.

Further analysis was carried out to estimate the impact of EPA on EAC trade with EU using Gravity model approach. The variables employed in the study included trade flow of goods (exports and imports) between two blocs, mass variables (real GDP growth, and per capita GDP) and dummy variables for capturing EPA and time. The findings show that generally EPA did not benefit EAC economies and suggest potential for trade diversion. Burundi trade was adversely affected by EPA while Kenya and Tanzania exports were positively impacted. The results may be influenced by weak productive capacities in EAC, global financial crisis which reduced demand, increased intra-EAC trade and trade with COMESA and SADC and low supply of goods for EU market.

It is suggested that EAC countries intensify their stance in negotiating on economic and development cooperation chapter, undertake deliberate measures to invest massive in both soft and hard infrastructure and reduce cost of doing business. It is expected that these efforts are critical in stimulating and attracting both domestic and foreign investment inflows. In addition, acquisition of financial resources for infrastructure upgrading is vital prior to undertaking full liberalization in 2033.