Trade creation and diversion effects in the tripartite region: A gravity approach

- 1 January 2020

Trade topics: Trade Modelling, Regional Integration

The paper employed the augmented gravity model to determine the trade creation and trade diversion effects of economic integration. Results indicate that the income importing country was significant at the 1% level, while the exporting one was weakly significant at the 10% level. Weighted distance was negative and significant at the 1% level. Of the country idiosyncratic factors, language was insignificant and shared border was significantly positive, while landlocked was significantly negative at 1%. The free trade area (FTA) variable indicated the degree of economic integration was significant at the 1% level. In terms of welfare effects, the study observed trade creation in SADC, but the results were inconclusive for COMESA. The EAC coefficient was significantly negative, implying that economies traded below the expected levels among themselves. The regional openness dummies indicated trade diversion effects. The EAC sign was positive and significant, implying that imports into the EAC from non-member countries in the rest of the world (RoW) were higher than the gravity model would predict, making it difficult to statistically determine the net welfare effects. The trade diversion coefficient for SADC was significantly negative. The net effect for SADC was negative, since trade diversion outweighs trade creation. The net effect for COMESA was positive, but statistically insignificant.

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