African Continental Free Trade Area: The Potential Revenue, Trade and Welfare Effects for the East African Community

The African Continental Free Trade Area (AfCFTA) was launched in 2018 and ratified in 2019. This study examines the likely effects of implementing the AfCFTA on the East African Community (EAC). Specifically, the study estimates the revenue, trade and welfare effects of trade liberalization under the AfCFTA and also identifies the sectors within the EAC that will react with either defensive or offensive strategies due to the continental agreement. Two analytical approaches are adopted by the study. First, a trend analysis of the EAC export and imports based on the COMTRADE and TRAINS databases is undertaken to identify the dominant sectors and partners. Second, the World Integrated Trade Solution simulation (WITS) -SMART analytical framework is used to examine the possible impacts of the different trade policy changes. Given that the EAC member states mainly export agricultural commodities and products and minerals, these are not likely to be readily imported by the rest of Africa. Indeed, between 2001 and 2018, the African continent heavily relied on external markets for exports and imports. Therefore, signing the AfCFTA agreement is a necessary but not a sufficient condition to increase EAC trade with the rest of Africa. Results for the trade effects paint a mixed picture among the EAC Partner States. First, all the EAC states are projected to incur tariff revenue losses, although this varies in absolute amounts and proportions. Second, whereas Uganda and Burundi experience positive welfare effects, Kenya, Tanzania and Rwanda experience negative welfare effects. The policy implications for the EAC and Africa as a whole arising from the analysis include: a need to build capacity for production; pursue product diversification and sophistication; innovate and attract investments; adopt high international products standards; improve competitiveness and target industrialization as a must.