Tariff-Adjustments and Intra-African Trade

The literature on the tariff – trade nexus currently provides limited or no guidance on whether tariff changes have symmetric effects on trade, and whether economic size affects trade benefits of tariff changes. An increase in tariffs may produce different trade effects from decreases in tariffs. If such asymmetry is proven, trade projections and policy decisions based on symmetric interpretation of tariff variations are bound to be unstable and misleading. Beyond the possible asymmetric effects of tariff changes, the smooth running of the AfCFTA also depends on the extent to which the trade-effect of tariff changes is contingent on economic size. On one hand, if smaller economies enjoy much smaller trade-gains from tariff reductions than larger economies, then smaller economies may be dis-incentivized from full participation in free trade area activities. On the other hand, if smaller economies gain more from tariff reductions than larger economies, then creation of the free trade area can be expected to reduce inequality and enhance trade integration across Africa. Overall, it is important to consistently track the effect of tariff reductions on AfCFTA member states even post implementation, to provide information for appropriate adjustment of trade rules and bring the best out of the agreement.
This study obtains trade-effects of tariff variations, as well as the interaction effects of tariff changes and economic size on bilateral trade. The overall effect of tariff adjustments is measured in terms of gross trade improvement without segregating this into trade diversion, and trade creation components as the focus is on overall trade improvement in Africa.

The data covers bilateral trade information on 49 African reporting countries from 1992 to 2016. Variables covered include, the Gross Domestic Product (GDP) of both Reporter and Partner countries (in billions of USD), tariffs, contiguity-whether the trading partners share a common border or not, whether trade partners share a common official language or not, and whether a colonial relationship exists between the pair of trading countries (e.g South Africa and Namibia). Other variables include number of HS6 products imported, and value of imports (in Billions of USD), exchange rates, and institutional quality. The institutional quality variables used are rule of law ratio, and regulatory quality ratio.