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Regional Integration in Trade Theory

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Regional Integration, Trade and Industry in Africa


Given widespread scepticism in trade economics about the value of RECs comprised of developing countries, the formal theory of regional economic integration is critically examined in four stylized configurations. Based on the overarching logic of trade creation and diversion, the usual diagrammatic treatment of tariff effects is critically discussed in terms of its numerous shortcomings. A single-country and REC-wise diagrammatic treatment of tariffs in the presence of increasing returns is proposed to allow quantitative assessment of the arguably most promising case for South-South RECs. Building on the literature, the cases of full and incomplete specialization within a regional group are discussed to capture concentration effects. This analysis is followed by an empirical investigation of the level which African economies have achieved with regard to diversification, specialization and sophistication of products. In addition, it is depicted what drives Africa’s cross-border agricultural trade in homogeneous products, where political concerns for food security intervene. It is concluded that South-South integration may be effective and useful, but it can only function with the help of strong policy coordination.

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  1. 1.

    Prepare for a still worse situation within a full customs union where all tariff revenue ‘b’ disappears in the community’s coffers, and as a member states you cannot be sure to get the full amount back. See below.

  2. 2.

    In their textbook, Krugman and Obstfeld recognize these kinds of additional benefits and also present a small additional diagram, making it possible to offset the Harberger losses against marginal social benefits when moving from Q1 to Q3 in contexts of market failure. They mention that the magnitudes can be optimized, but do not elaborate (Krugman and Obstfeld 1994).

  3. 3.

    For a handbook treatment of the issue along these lines see McCulloch, Winters and Cirera (2001).

  4. 4.

    When leaving the realm of constant or decreasing returns to scale, in standard economics one also enters the world of imperfect competition and feels uncomfortable. Cases of monopolistic supply are indeed empirically relevant in developing country RECs that are analysed here and deserve formal treatment with a view to competition policy measures. We neglect this twin dimension of increasing returns here, except for one special case below.

  5. 5.

    In Baldwin/Wyplosz’s representation, the tariff revenue b″ would even comprise a section of the rectangle below the shaded b″, but this is only due to the fact that the reduced import supply implies a downward move on the MSRoW curve, thus a higher difference between PRTA and Pfree, but this is entirely due to the assumed slope of the RoW supply, which is suddenly no longer considered infinitely elastic.

  6. 6.

    In still more realistic treatment, one would have to lower the MSRoW supply line as well. REC creation typically comes not only with discriminatory tariff against the rest of the world, but also with lower MFN tariffs than the member states had at inception. This approach is also strongly recommended by the WTO. During EAC creation, only Kenya had to accept some higher common external tariffs because the country had previously been more liberal than some of the new fellows. Similarly, the new ECOWAS CET would force some member states to apply higher rates than they had before (if this is not countered by the ECOWAS EPA). We have left this complication out of the diagrams.

  7. 7.

    See Ribhegge (2011) for further references regarding the European Union and Turkey as a hypothetical accession country at that time. Treatment of the case for a REC of advanced countries allows a number of simplifications in the stylized diagrammatic treatment, among them identical supply curves of partner and RoW because similar technologies can be assumed within and outside the community.

  8. 8.

    Brücher presents a number of arguments for why Collier’s suggestive comparison is simply not accurate at the aggregate level (Brücher 2016: 45, 63).

  9. 9.

    Consequently, the authors of the WDR 2009, in which the four-pronged literature on scale economies is evaluated in terms of their impact on economic geography, defended regional integration and refuted “a false choice between regional versus global integration. Both are necessary because they support different objectives. Regional integration helps small and remote countries scale up supply capacity in regional production networks. This, in turn, allows these countries to access global markets” (Deichmann and Indermit 2008: 45).

  10. 10.

    Basically, the case is identical to the formal treatment of the difference between discriminatory trade liberalization with high-productivity countries (the EU case) and with low-productivity countries (the African REC case), under the assumption of a small open economy in Baldwin/Wyplosz (2015: 144–146).

  11. 11.

    See the comprehensive review of African transport systems, still astonishingly accurate, in Pedersen (2001).

  12. 12.

    This applies except for interventions like Stiglitz, Cimoli and Dosi, as cited in Part III. They argue mainly for the preservation of national industrial policy space and not so much for regional economic communities of developing countries.

  13. 13.

    The German development cooperation edited a volume on ‘development-friendly’ EPAs, which erroneously considered the trade-in-goods part as a done deal, already in 2009, and ventured out into the deep integration/ Singapore issues with the obvious intention of enticing unenthusiastic African negotiators to accept these issues for a second round of negotiations and AfT business (GTZ 2009). The issue will be discussed in Part III.

  14. 14.

    Bakeries count for much in the total of African enterprise surveys—a classic for the statistical confusion of ‘industrial’ and ‘artisanal’ activity. For details see the respective UNIDO Yearbook (2018).

  15. 15.

    The trade nomenclature of the Harmonized System administered by the World Customs Organization (WCO) is compatible yet not identical with the other often used UN System of International Trade Classification (SITC), since the latter’s revision 4.0.

  16. 16.

    Moreover, the AfDB/OECD/UNDP African Economic Outlook follows the rule that products are reported only when they account for more than 4% of total exports. While pragmatically understandable, this method of calculation can be misleading at both ends of the scale: both for countries that concentrate on one bulk commodity alongside a range of miscellaneous products, and for developed countries with a wide range of manufactured goods.

  17. 17.

    The best-known application of the Herfindahl index in political economy analysis is the ethnolinguistic fractionalization (ELF) index, where the inverse (1–H) is used to denote high fractionalization by high values (Easterly and Levine 1997). The results for Africa are as inconclusive as for the measure of economic diversification.

  18. 18.

    The frequent empirical finding that Africa exports mainly raw materials but trades manufactured goods in the interior does not contradict our summary. In fact, rather unsophisticated industrial goods are traded on the continent, frequently agricultural goods that have undergone just one or two transformation steps and thus appear to be manufactured.

  19. 19.

    See his seminal communication based on a statistical analysis of early EEC integration from 1958 to 1963 in Balassa (1966).

  20. 20.

    A good textbook summary of the related literature on smooth adjustment in the wake of Balassa was already available nearly two decades ago, see Hoekman and Kostecki (2001: 350) based on Greenaway and others.

  21. 21.

    For a graphic description, see Perry (2015: Chap. 12), who also contends that the emerging commodity exchanges in Africa can contribute to a solution for trade in homogenized goods.

  22. 22.

    When the absence of trade agreements with third, extra-African parties leaves RECs with the option to place import products on exclusion lists, arbitrary treatment of bulk products for no obvious developmental reason is also observed in extra-regional trade. A critical assessment of the practice surrounding the EAC CET Sensitive Products List suggests that decision-making by the Council of Ministers often misjudges REC-internal production capacity, providing temporary relief for embattled domestic producers rather than strategically mounted developmental support (Shinyekwa and Katunze 2016).

  23. 23.

    For a concise review of the problem related to food staple market volatility and imperfect policy solutions, see Morrison and Sarris (2016). Interestingly, the policy recommendations of the authors focus on the need for increased political confidence in functional regional food markets in order to eliminate the innumerable NTBs in this segment. This supports the call for the political trust building mentioned above in order to push progress in climbing the imagined ladder of integration.

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Correspondence to Helmut Asche .

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Asche, H. (2021). Regional Integration in Trade Theory. In: Regional Integration, Trade and Industry in Africa. Advances in African Economic, Social and Political Development. Springer, Cham.

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