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Determinants of Trade integration in the East African Community. A systematic review of existing literature
- Jonath Asimwe
- Apio Scovia
- 1126-1135
- Jul 5, 2024
- Economics
Determinants of Trade integration in the East African Community. A systematic review of existing literature
Jonath Asimwe1, Apio Scovia2
1PhD student at the Pan African University, Institute of Governance, Humanities and Social Sciences
2Masters Student at the Pan African University, Institute of Governance, Humanities and Social Sciences
DOI: https://dx.doi.org/10.47772/IJRISS.2024.806085
Received: 10 June 2024; Accepted: 19 June 2024; Published: 04 July 2024
ABSTRACT
Trade integration has been game changer for economic growth among EAC member’s states. The economic impact has led to expansion of the membership scope to include Somalia which joined recently the bloc. However, limited data on the determinants of trade integration in EAC made it necessary to conduct study with particular focus on systematic review of exiting literature. Furthermore, the study was supported by Trade liberalization theory by Krueger (1978), which posits that the reduction of trade barriers through initiatives like regional trade integration agreements serves to bolster economic efficiency, competition, and productivity growth, thereby fostering inclusive economic growth. Moreover, the study employed visualization method for the selection of the articles relevant to the study from ProQuest, Scopus, Google Scholar, and Research Gate databases which yielded a total of 187 scholarly publications. 46 papers were selected for assessment and analysis after being qualified and subjected to inclusion and exclusion criteria. The study established that, geography proximity, economic size diversity, trade liberalization policies, infrastructure and connectivity, political stability and security, social and cultural ties and technological advancement as the key determinants of trade integration in EAC. The study suggested that additional trade liberalization and measures to increase domestic and regional demand are necessary for greater regional integration in East Africa.
Keywords: Determinants, Trade integration, trade liberation,
INTRODUCTION
Trade is often seen as a key driver of economic growth and prosperity, allowing nations to specialize in their areas of comparative advantage, leading to increased productivity and welfare (Adam, 1776). Sociologists and anthropologists view trade as a complex social phenomenon, influencing cultural identities, norms, and social structures (Geertz, 1973).
Political scientists analyze trade through power dynamics and geopolitical relations, arguing that it can shape alliances, influence foreign policies, and mitigate tensions while philosophers like Immanuel Kant view trade as a means to foster peace and mutual understanding among nations, promoting a harmonious global order based on mutual benefit and cooperation.
Era & Romain (2016), argue that by eliminating tariffs and other trade barriers within a region, countries can achieve economies of scale, lower production costs, and enhance competitiveness in international markets. Furthermore, regional integration can attract foreign investment and stimulate cross-border trade, leading to increased employment opportunities and higher standards of living. In addition to economic advantages, regional trade integration fosters political cooperation and stability among member states. Important to note is that by forging closer economic ties, countries can build mutual trust and resolve conflicts through diplomatic channels rather than resorting to armed conflict enabling regional trade integration to serve as a platform for addressing common challenges such as environmental protection, migration, and security threats (International Trade Council, 2023).
Despite the potential benefits, regional trade integration also presents challenges and risks. Iammarino, Rodriguez-Pose & Storper (2019), warn that integrating economies with vast disparities in size, development levels, and resources can exacerbate income inequalities and hinder social cohesion. Moreover, regional integration may lead to the marginalization of smaller and less-developed countries within the trading bloc, perpetuating asymmetries of power and influence. Important to note is that the concept of regional trade integration is closely intertwined with the broader forces of globalization.
The East African Community (EAC), which consists of Kenya, Burundi, Somalia, Burundi, Congo, South Sudan, Tanzania, and Uganda, is one of the preferential trade areas among the several regional trading arrangements (RTAs) that have emerged in Africa. The current EAC, often known as the “new” EAC, is a rebirth of the former EAC, a customs union that was founded in 1967 at the close of colonialism and disintegrated in 1977 for a number of political and economic reasons. By creating a customs union, common market, monetary union, and finally a political federation, the “new” EAC hopes to bring its members closer together on a regional level. In 2003, the aggregate GDP of the three EAC members was $31.4 billion (DeRosa, et al (2003). The figure will keep on raising despite the economic crisis members face occasioned by global chain disruption. Despite the economic progress resulting from Trade integration in EAC there is little information in relation to its determinants in the literature which made it necessary to conduct this study.
Trade liberalization theory
This theory expounded by Krueger (1978), posits that the reduction of trade barriers through initiatives like regional trade integration agreements serves to bolster economic efficiency, competition, and productivity growth, thereby fostering inclusive economic growth. This theory underscores the significance of dismantling obstacles like tariffs and quotas to widen market access and streamline the movement of goods and services across borders. Through such measures, regional trade integration aims to create a more conducive environment for businesses, both large and small, to thrive and expand their operations. The overarching objective of Trade Liberalization Theory is to enhance economic efficiency by removing artificial barriers that impede the flow of goods and services, as stated by Krueger (1978). By fostering a more competitive market environment, regional trade integration encourages firms to optimize their production processes, innovate, and specialize in areas where they possess a comparative advantage.
This, in turn, leads to increased productivity, as resources are allocated more efficiently across different sectors of the economy. Ultimately, the pursuit of economic efficiency through trade liberalization is believed to result in higher levels of overall economic output and welfare.
The weakness of the theory as propagated by the opponents is that, as results of influx of cheaper items into the local market, the strategy may result in job losses. They also assert that the products could be less safe and of worse quality than equivalent domestic competitors’ goods, which might have passed more stringent quality and safety inspections.
METHODOLOGY
The methods and techniques employed in choosing previously published knowledge material for a systematic review were predicated on the eligibility conditions, which were primarily guided by the research question: What are the determinants of trade integration in the East Africa community region? The criteria for choosing academic and peer-reviewed scientific literature materials from online databases were trade integration and determinants. After a comprehensive prescreening and reexamination of the extent of information acquired on the research study elements, the most appropriate prior research outputs were selected. These results demonstrated the precision and comprehensiveness of the data pertaining the subject matter under investigation.
Source: Author’s construct (2024)
RESULTS AND DISCUSSION
i. Geographic proximity
According to Samad, Masood and Ahmed (2023), geographic proximity can lead to increased trade flows due to reduced transportation costs and time within EAC. Countries or regions that are geographically close to each other often share common borders or are connected by land or sea routes, making trade more feasible and cost-effective (Ali, 2017). Ali argues that proximity fosters trade alliances and regional economic integration efforts by encouraging the formation of regional production networks and value chains, where firms leverage each other’s strengths and resources across nearby locations. Moreover, (Krugman, 1991) in his theory of economic geography underscores how geographic proximity influences the pattern of trade by promoting the agglomeration of economic activities in spatial clusters or industrial districts. Krugman’s model suggests that industries tend to concentrate in certain geographic areas to take advantage of economies of scale, knowledge spillovers, and specialized labor pools. This concentration further reinforces the importance of geographic proximity in shaping trade patterns and regional development. This proximity provides them with easier access to trade opportunities, technology transfer, and foreign investment, thereby enhancing their competitiveness and economic prospects. Furthermore, Brennan & Martin (2012) believe that geographic proximity is not solely about physical distance but also encompasses cultural, linguistic, and historical ties between neighboring countries or regions they further emphasize that shared cultural affinities and historical linkages can foster trust and cooperation among neighboring nations, promoting regional trade integration and economic collaboration.
ii. Economic size and diversity
Krugman, (1991) emphasized the significance of economic size as a determinant of trade patterns and integration noting that larger economies within a region possess greater market potential, production capacity, and consumer demand, making them pivotal drivers of regional economic activity. These economies often serve as anchors for trade and investment, attracting businesses and fostering supply chain linkages across borders. Furthermore, Beine & Coulombe (2007) assert that economic diversity plays a crucial role in regional trade integration. They believe that diverse economies within a region contribute to the expansion of trade opportunities by fostering specialization and comparative advantage. With this, each economy can focus on producing goods and services in which it has a relative efficiency, leading to increased intra-regional trade flows. Moreover, economic diversity mitigates the risks associated with external shocks, as regions with a wide range of industries are more resilient to fluctuations in global markets.
The interplay between economic size and diversity is explored by Kurečić & Luša (2020), stating that while large economies may dominate regional trade, smaller economies can still benefit from integration by specializing in niche products or forming complementary production networks. These dynamic fosters interdependence among countries of varying sizes, leading to deeper integration and mutual gains. Additionally, economic size and diversity are closely linked to the concept of trade complementarity where by countries with complementary economic structures are more likely to engage in trade and integration, as they can exploit each other’s strengths to mutual advantage (Markosyan, 2018) . For example, a region with a mix of agriculture, manufacturing, and services may experience synergies that promote intra-regional trade and investment.
iii. Trade liberalization policies
Bernard, Redding & Schott (2007) argued that trade liberalization leads to allocative efficiency by allowing resources to flow to sectors where countries have a comparative advantage, thereby maximizing overall welfare. Moreover, proponents of trade liberalization, such as Chikkara (2018) emphasize the role of free trade in stimulating economic growth and poverty reduction through increased specialization and productivity gains.
However, from a critical perspective, Siddiqui (2017); Weller & Hersh (2002), caution against the potential adverse effects of trade liberalization, particularly on developing countries. They argue that unfettered liberalization can exacerbate income inequality, weaken domestic industries, and undermine social protections, leading to economic vulnerability and social instability. Furthermore, scholars such as Kumar & Gallagher (2007), highlight the importance of policy space for developing countries to pursue industrial policies and protect infant industries, challenging the one-size-fits-all approach advocated by proponents of trade liberalization. Institutional economists, such as (Baldwin, 2016) argue that International agreements and institutions, like the World Trade Organization (WTO), significantly influence trade liberalization by providing a framework for negotiations, resolving disputes, and promoting stability and predictability in international trade relations.
Moreover, political economists like O’brien & Williams (2020); Peinert (2020), emphasize the domestic political dynamics that influence the adoption and implementation of trade liberalization policies. They argue that trade liberalization often involves trade-offs between economic efficiency and distributional concerns, with winners and losers from liberalization exerting influence through lobbying and political pressure.
iv. Infrastructure and Connectivity
Cockburn, Dissou, Duclos & Tiberti (2013) argued that robust infrastructure, including transportation networks, telecommunications, and energy systems, facilitate the movement of goods, services, and people across borders. Efficient connectivity reduces transportation costs, enhances market access, and fosters trade expansion within a region. Furthermore, investments in infrastructure projects stimulate economic growth, attract foreign direct investment (FDI) and create employment opportunities (Cockburn et al., 2013).
Hong, Chu & Wang (2011), emphasized the role of infrastructure and connectivity in driving regional development and narrowing economic disparities. They argue that equitable access to infrastructure services, like transportation and communication networks, promotes inclusive growth by connecting remote regions to major economic centers. This connectivity integrates peripheral areas, stimulates local entrepreneurship, and reduces spatial inequalities. Investments in infrastructure projects enhance productivity, facilitate technology diffusion, and support sustainable development. Kunaka, Hartmann, Raballand & Shamte (2017) further underscore the significance of infrastructure and connectivity in enhancing trade efficiency and competitiveness stating that, adequate transportation infrastructure, logistics systems, and border facilities are crucial for reducing trade costs and expediting cross-border movements. Investments in digital infrastructure and e-commerce platforms facilitate access to new markets and promote innovation-driven trade. Countries with well-developed infrastructure enjoy greater trade diversification, higher export volumes, and increased market share in global value chains.
According to (Miraj, Zulkarnain & Muslim (2019) Infrastructure and connectivity are crucial for regional cooperation and integration. Shared projects, transportation corridors, and logistics networks foster economic ties, overcoming geographical barriers. Notably joint investments in infrastructure projects build trust, strengthen diplomatic relations, and facilitate regional cooperation in trade, investment, and infrastructure development. This contributes to peace, stability, and prosperity in the region. These studies collectively underscore the critical role of infrastructure and connectivity in promoting economic growth and reducing regional disparities.
v. Political stability and security
According to Singha & Singh (2022), political stability refers to the absence of major political upheavals or disruptions within a country, characterized by the continuity and predictability of government policies. The stability fosters a favorable environment for businesses to operate and invest, thereby enhancing domestic and international trade relations while security as defined by Rothschild (1995), encompasses not only military security but also economic and societal security. It involves safeguarding a nation’s interests from external threats such as conflicts, terrorism, or disruptions to supply chains. Political stability and security are intertwined, as a stable political environment often contributes to enhanced security measures, fostering confidence among traders and investors.
Political stability and security play a significant role in shaping the attractiveness of a region for trade and investment. According to Radu (2015), political stability is a fundamental determinant of economic development, as it provides the necessary conditions for businesses to thrive and economies to grow. Political instability and security concerns in regions like the Middle East and Africa can hinder trade activities, leading to economic stagnation, and hindering investment. Therefore, maintaining stability and security is crucial for promoting regional trade integration.
Political stability and security are closely linked to governance and institutional quality in a region. Effective governance structures ensure stability, promote rule of law, and protect property rights. Strong institutional frameworks lead to greater stability, security, and economic growth. Conversely, weak governance can lead to political unrest, corruption, and social tensions, hindering regional trade integration efforts
vi. Social and cultural ties
Social and cultural ties play a crucial role in regional trade integration by fostering trust, cooperation, and shared identity among member countries. These ties encompass various aspects of social interaction, such as language, religion, customs, and historical connections, which can significantly influence trade relationships within a region. According to Burrmann, Braun & Mutz (2020), social ties are characterized by “shared values, norms, and understandings” that enable cooperation among states. Cultural ties foster mutual understanding and collaboration in trade matters, bridging cultural differences and facilitating communication and negotiation processes among stakeholders, despite economic interests often transcending these ties (Burrmann et al., 2020). Moreover, social and cultural ties can create a sense of community and solidarity among member countries, leading to increased willingness to support regional integration initiatives (Vojinović, 2019). For example, the European Union’s initiatives like Erasmus promote cultural exchange and cooperation, fostering a sense of European identity and solidarity among member states, and enhancing economic integration.
Furthermore, social and cultural ties can act as informal channels for information sharing and market knowledge dissemination, facilitating trade relationships and market access (Gordini, 2022). By leveraging cultural similarities and social networks, businesses can navigate unfamiliar markets more effectively and establish partnerships with local firms, thus enhancing trade flows within the region. Additionally, shared cultural heritage and traditions can create demand for certain products and services across borders, driving intra-regional trade and investment (Dekker, 2016).
vii. Technological advancements
According to Jha, Acemoglu & Robinson (2012), technological advancements are central to the process of economic growth and development, driving productivity gains and fostering innovation. They argue that technological progress plays a crucial role in shaping the long-term prosperity of nations by enabling the creation of new industries and improving the efficiency of existing ones.
Furthermore, Blair & Pagano (2020) emphasize the transformative nature of technological advancements, highlighting their role in driving major shifts in societal structures and norms. They contend that technological progress is not only about the invention of new gadgets or processes but also about fundamentally altering the way people live, work, and interact with each other.
In the context of regional trade integration, technological advancements play a pivotal role in facilitating trade flows and reducing transaction costs. According to (Baldwin, 2016), advancements in information and communication technologies (ICTs) have transformed the landscape of international trade by enabling real-time communication, electronic transactions, and the coordination of complex supply chains across borders. ICTs have also facilitated the emergence of e-commerce platforms, allowing businesses to reach customers in distant markets more efficiently.
CONCLUSION
The results show fast-growing intra-regional and overall trade for most of the countries in the region. It also finds that the link between the determinants of regional trade integration has a positive impact on the total trade and intra-regional trade volume. However, the size of an economy has no significant effect on intra-regional trade share since smaller economies can benefit from focusing on one product. The finding suggests that further liberalization of trade together with policies boosting domestic/regional demand are helpful for broader regional integration in East Africa.
SCOPE FOR FUTURE RESEARCH
The recent economic progress trends witnessed in most of EAC members state is commendable. The future research should focus on new emerging determinants promoting trade integration in EAC and triangulate findings with qualitative data which the study. This will provide in-depth information on current trends in the economic growth within the EAC to the policy makers fostering formulation of evidence-based interventions for decision making.
DISCLAIMER
The views stated in this article are those of the writers and may not be a reflection of any of the entities listed.
CONFLICT OF INTEREST
The authors of this paper all state that they have no competing interests.
FUNDING STATEMENT
All of the research for this study was done without the assistance of any outside funding. The writers’ contributions paid for the costs of the fieldwork and publishing.
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