Regional Trade Agreements and Employment

A RTA8 is an agreement among governments to liberalise trade and possibly to co-ordinate other trade related activities. There are four principal types of RTAs with the coverage and depth of preferential treatment varying from one RTA to another: – free trade area; – customs union; – common market; – economic union. As summarised by the Lloyd and MacLaren (2003)9 RTAs were viewed as a step towards free global trade, leading to lower trade barriers, at the time of the formation of the General Agreement on Tariffs and Trade (GATT) in 1948. This perception changed when Viner (1950)10 recognised that the trade induced by a free trade area or a customs union was of two types, which he called trade creation and trade diversion. Subsequent papers provided examples where the country to which trade is diverted may gain even when trade diversion occurs. There is a wide body of theoretical literature on the limitations and benefits of RTAs as well as empirical studies on the effects of RTAs which are outside of the scope of this query response to discuss in depth. However, as clearly summarised by Kritzinger-van Niekerk (2005) 11 there are three ‘traditional gains’ from RTAs.

There are:

Trade gains: Due to regulation enabling free trade between member states and increased demand for goods and services from member states. The body of evidence shows that there can be both positive and negative effects on trade. Though RTAs are designed to the advantage of signatory countries, expected benefits may be undercut if distortions in resource allocation, as well as trade and investment diversion, potentially present in any RTA process, are not minimised, if not eliminated altogether. An RTA’s net economic impact will depend on its own architecture and the choice of its major internal parameters (in particular, the depth of trade liberalisation and sectoral coverage) as well as concurrent policy by RTA parties which can play an important role in defusing potential distortions12.

Increased returns and increased competition: Through exploitation of economies of scale and through the increased market access due to the RTA. Standard economic theory predicts greater efficient resource allocation and higher growth as a result of the utilisation of existing comparative advantage. In practice trade can increase competition and entrepreneurship in traditional and new sectors (and hence jobs) or, can lead to growth primarily in capital-intensive sectors resulting in jobless growth. The United Nations Development Programme (UNDP, 2011)13 explores regional economic integration and its potential impacts on human development, with a focus on Africa. The report finds that whilst regional economic integration will always have an impact on employment, the employment effects, both positive and negative, will not be uniform across geographical areas, sectors or types of workers. Labour may also be displaced through the use of new technologies. The structure of the labour market is subsequently important in determining the impact of regional economic integration on employment.

Investment: By attracting Foreign Direct Investment (FDI), from within that outside the RTA, as a result of market enlargement, production rationalisation (reduced distortion and lower marginal cost of production). As with trade investment has both direct and indirect effects on job creation and there is a divergence of opinion on the exact effect on employment. As highlighted by Baldwin (1995)14 conclusions about net employment effects of FDI are problematic due to the very different employment effects that could occur as a result of various plausible alternative assumptions about what will happen in the absence of foreign investment? In addition there will be effects from any agreement on taking forwards regionally beneficial investment such as that in the transit sector.

The EAC

The EAC is the regional intergovernmental organisation of the Republics of Burundi, Kenya, Rwanda, the United Republic of Tanzania, and the Republic of Uganda. The Treaty for Establishment of the EAC was signed on 30 November 1999 and entered into force on 7 July 2000 following its ratification by the original three Partner States – Kenya, Tanzania and Uganda. The Republic of Rwanda and the Republic of Burundi acceded to the EAC Treaty on 18 June 2007 and became full Members of the Community with effect from 1 July 200715. It should be noted that a previous, unsuccessful, EAC was established in 1919 and ceased to function in the 1970s16. Reasons for the collapse include political and ideological differences as well as disparate levels of economic development –Kenya in particular was perceived as benefiting the most from the agglomeration. As outlined by the African Development Bank (AfDB)17 the main objective of the Treaty for Establishment of the EAC is to improve the region’s competitiveness by achieving deeper economic integration. Steps towards full economic integration include:

 A customs union protocol signed in 2004 and established in 2005 which led to the introduction of a common external tariff and gradual elimination of internal tariffs;

 A Common Market Protocol (CMP) signed in 2010 allowing free movement of goods, persons, labour, services, and capital;  A Monetary Union protocol signed in 2013 which outlines a ten-year roadmap toward monetary union18; and,

 The East African Cross Border Payment System launched in 2013 as part of a larger plan by the EAC economies to integrate their money and capital markets19. The objectives of the implementation, by the EAC and Partner States, of policies, strategies and programmes targeted improving the region’s competitiveness is outlined in the EAC development strategy for 2011/12 – 2015/ 1620. They include the alleviation of the constraints and bottlenecks along a value chain, improved connectivity for ease of the flow of goods and services, adding value to the regional economy and facilitating a competitive regional economy that attracts investment thus generating economic growth, job creation and poverty alleviation. The five EAC member states have made commitments to open up and create regional markets in several services sectors and have accepted to remove restrictions on the free movement of workers and on the right of establishment and to pursue mutual recognition of academic and professional qualifications21. In spite of this the implementation of the CMP has been sluggish. As stated by the AfDB (2012)22, the EAC Secretariat and member states face major challenges with regard to putting in place the necessary regulations to operationalize and implement the Common Market Protocol. In addition, the overlapping nature of the regional trade agreements in East Africa poses a number of administrative difficulties. Non-tariff barriers continue to hinder the free flow of goods between EAC countries. The necessity of political support and the effective implementation of policy for regional economic integration in the EAC have a wide body of evidence. This is not discussed here.

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