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Trade Creation and Trade Diversion Effects in the EU-South Africa Free Louisiana State University LSU Digital Commons LSU Master's Theses Graduate School 2006 Trade creation and trade diversion effects in the EU-South Africa Free Trade Agreement Gregory Emeka Kwentua Louisiana State University and Agricultural and Mechanical College, [email protected] Follow this and additional works at: https://digitalcommons.lsu.edu/gradschool_theses Part of the Agricultural Economics Commons Recommended Citation Kwentua, Gregory Emeka, "Trade creation and trade diversion effects in the EU-South Africa Free Trade Agreement" (2006). LSU Master's Theses. 557. https://digitalcommons.lsu.edu/gradschool_theses/557 This Thesis is brought to you for free and open access by the Graduate School at LSU Digital Commons. It has been accepted for inclusion in LSU Master's Theses by an authorized graduate school editor of LSU Digital Commons. For more information, please contact [email protected]. TRADE CREATION AND TRADE DIVERSION EFFECTS IN THE EU-SOUTH AFRICA FREE TRADE AGREEMENT A Thesis Submitted to the Graduate Faculty of the Louisiana State University and Agricultural and Mechanical College In partial fulfillment of the Requirements for the degree of Master of Science in The Department of Agricultural Economics and Agribusiness by Gregory Emeka Kwentua B.Ag.University of Nigeria, 1988 May 2006 ACKNOWLEDGEMENTS I would like to express my profound gratitude to all those who made the completion of this thesis possible. I am deeply indebted to my major professor, Dr. P Lynn Kennedy whose patience, tolerance, guidance, and support motivated me throughout the study period. I want to thank my committee members, Dr. Wes Harrison Jr. and Dr. John Westra, for their contributions throughout the development and completion of my thesis. Furthermore, I would like to specially thank my wife Bolajoko whose patient love and kindness enabled me to complete this thesis. I would like to thank my mom Francisca, Brother Victor and his wife Rica, Alex, Sister Kate and her husband Obi, nephew Adam, nieces Victoria, Meredith and Faith, Cousin Gladys and her family. Finally, I would want to thank my fellow graduate students Hassan Marzougi, Sachin Chitawar, Pawan Paudel, Brian Hilbun, Christane Aust and Carlos Ignacio Garcia who have been of enormous support towards the completion of my thesis. ii TABLE OF CONTENTS ACKNOWLEDGEMENTS............................................................................................... iv LIST OF TABLES.............................................................................................................. v LIST OF FIGURES ........................................................................................................... vi ABSTRACT...................................................................................................................... vii CHAPTER 1 INTRODUCTION ....................................................................................... 1 Regional Trade Agreements ........................................................................................... 1 Southern African Customs Union (SACU)................................................................. 3 Common Market for and East and Southern Africa (COMESA)............................... 3 European Union (EU) ................................................................................................. 4 Historical Background .................................................................................................... 5 Problem Statement.......................................................................................................... 6 Justification..................................................................................................................... 7 Study Objective............................................................................................................... 8 Thesis Organization ........................................................................................................ 9 CHAPTER 2 LITERATURE REVIEW ........................................................................... 10 A Standard Gravity Model............................................................................................ 10 CHAPTER 3 METHODOLOGY ..................................................................................... 15 Economic Theory ......................................................................................................... 15 Theoretical Linkages to the Gravity Model.................................................................. 18 Impact of Income on Trade (Exporting Country)..................................................... 19 Impact of Income on Trade (Importing Country)..................................................... 19 Transaction Costs...................................................................................................... 20 Effects of Economic Integration: Trade Creation and Diversion Effects..................... 21 A Standard Gravity Model............................................................................................ 30 CHAPTER 4 EMPIRICAL ANALYSIS.......................................................................... 34 Estimation Techniques.................................................................................................. 34 The Data........................................................................................................................ 34 The Variables................................................................................................................ 35 Results........................................................................................................................... 38 Interpretation of Model Coefficients ........................................................................ 39 Bilateral Trade Model............................................................................................... 40 Export Model ............................................................................................................ 43 Summary....................................................................................................................... 47 CHAPTER 5 SUMMARY AND CONCLUSIONS......................................................... 51 iii Summary....................................................................................................................... 51 Conclusions................................................................................................................... 52 Further Study and Limitations ...................................................................................... 53 REFERENCES ................................................................................................................. 54 APPENDIX 1: PTA MEMBERSHIP ............................................................................... 58 APPENDIX 2: REGIONAL AND PREFERENTIAL TRADE AGREEMENT DUMMY VARIABLES ............................................................................................... 59 APPENDIX 3: NON TRADE AGREEMENT VARIABLES …………………………..95 VITA............................................................................................................................... 133 iv LIST OF TABLES 4.1. Gravity Model Variables by Symbol, Variable and Expected sign……………………………………………………… 36 4.2. Definition of Variables and Data Sources………………………...... 37 4.3. Gravity Model Estimated results (Log Bilateral Trade as Dependent Variable)…………………………………………............ 49 4.4. Gravity Model Estimated Results (Log Exports as Dependent Variable)…………………………………………............................... 50 v LIST OF FIGURES 3.1. Impact of Income on Trade (exporting country)……………………….. 22 3.2. Impact of Income on Trade (importing country)……………………….. 23 3.3. Impact of Transaction costs on Trade…………………………………... 24 3.4. Trade Creation effect of a customs union……………………………….. 28 3.5. Trade Diversion effect of a customs union……………………………….29 vi ABSTRACT This study examines trade creation and trade diversion effects in the EUSAFTA using the standard gravity model of bilateral trade flows. The estimation of the gravity equation was carried out using the OLS analysis. In order to ascertain the overall trade creation and trade diversion effects explanatory variables such as GDP, distance and dummy variables were incorporated into the estimation equation to explain bilateral trade flows and exports respectively. The main focus was on the estimation of trade creation and trade diversion effects, resulting from participation in selected regional and preferential trade agreements like EU, COMESA, SACU and EUSAFTA. Additionally, the overall effects of regional and preferential trade agreements are positive and significant indicating that trade agreements, induce and generate huge trade volume among member countries. The trade creation effects of (SACU) were negative. This study demonstrates that participation in Regional and Preferential Trade Agreements stimulates trade between member countries. They also stimulate trade with non-member countries, perhaps as a result of an income effect. vii CHAPTER 1 INTRODUCTION The conclusion of the Uruguay Round Agreement in 1994 and subsequent creation of the World trade organization led to a proliferation of overlapping preferential trade and/or integration initiatives in nearly all corners of the globe. A number of countries and South Africa have been in a variety of Trade Agreements. The main objective of this
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