Poverty and Shared Prosperity Implications of Reducing Trade Costs Through Deep Integration in Eastern and Southern Africa

Evidence indicates that trade costs are a much more substantial barrier to trade than tariffs, especially in sub-Saharan Africa. We decompose trade costs into: (i) trade facilitation; (ii) non-tariff barriers; and (iii) the costs of business services. Our paper is the first CGE-microsimulation model to assess the poverty and shared prosperity impacts of the reduction of trade costs. We examine policies to reduce trade costs in: (i) the "Tripartite" FTA among COMESA, SADC and the East African Customs Union (EACU); (ii) within the EACU alone; and (iii) unilaterally by the EACU. Our CGE model contains imperfect competition and foreign direct investment, which allows us to assess the poverty effects of services liberalization. We find that there are significant reductions in the poverty headcount, the percentage of the population living in poverty and increases in the incomes of the bottom forty percent of the population for all six of our African regions from deep integration in the Tripartite FTA or comparable unilateral reforms by the EACU. Despite the uniform increases in income for the poorest 40 percent, we find that trade facilitation tends to increase the share of income captured by the poorest 40 percent of the population, while services reform decreases the share. We find that the estimated gains vary considerably across countries and reforms. Thus, countries would have an interest in negotiating for different reforms in different agreements.