Do south-south trade agreements increase trade? Commodity-level evidence from COMESA

Preferential trade agreements between low-income countries are proliferating: 70 new ‘South-South’ agreements were signed between 1990 and 2003. Yet the impact of these agreements is largely unknown. This paper investigates the effects of South-South preferential trade agreements through a study of how Uganda’s entry into the Common Market for Eastern and Southern Africa (COMESA) affected imports.

Using detailed import and tariff data for more than 1,000 commodities, the analysis finds that reductions in the preferential tariff rate applied by Uganda to other COMESA member countries produced small but positive effects on trade volumes. Contrary to predictions regarding South-South agreements, these increases are found to be the result of trade creation, rather than of trade diversion. The effects on trade vary across sectors, with larger increases in trade volumes occurring in those industries in which developing countries tend to have a comparative advantage.

The study suggests two possible explanations for the relatively small trade creation effect. The first is that consumers in low-income countries tend to be relatively less responsive to changes in prices, and are thus less likely to benefit immediately from trade reform. Search costs may partly explain the reluctance of low-income consumers to switch the origin of their purchases from one country to another.

The second possible explanation is that South-South agreements are unlikely to produce substantial increases in trade volumes between low-income countries because of the similar characteristics of the two economies:

• there is little incentive to trade as the countries tend to produce similar goods
• efficiency gains are limited because South-South agreements offer their members access to smaller markets than do North-South agreements
• competitive efficiency pressures are likely to be weak when firms across member countries have similar efficiency levels.

Nevertheless, the authors concede that even small trade creation effects could be significant for low-income African countries, and such agreements may also potentially have non-economic benefits. However, these need to be weighed against the loss in tariff revenues and the burden for poor countries of negotiating and managing such agreements.