In this paper, we measure trade costs for ECOWAS countries and infer their impact on trade flows. The paper applies an unconditional general equilibrium trade model consistent with the Ricardian and heterogeneous firms’ models of trade to estimate a trade cost equation to obtain the tariff equivalent trade cost measure for ECOWAS countries. The method expresses the trade cost parameters as a function of observable trade data. We find that over the period 1980-2003, the cost of trading within SSA was the highest, compared to other regional groups, at an average tariff equivalent of 271.5 percent. On average ECOWAS countries traded with their trading partners at a tariff equivalent trade cost of 268.2 percent, higher than countries from other regional blocs within and out of SSA. With regards to trade flow involving ECOWAS countries, estimates of tariff equivalent trade costs indicates that on average ECOWAS countries traded among each other at a lower cost than with other trading partners from economic blocs out of ECOWAS. This could be attributed to the positive impact of regional trade integration efforts. Over the years especially since 2000, ECOWAS seemed to have promoted intra-ECOWAS trade especially with regards to export of manufactures. With regards to countries within ECOWAS, intra-ECOWAS trade costs with Cote d’Ivoirewere the lowest at an average tariff equivalent trade cost of 138.5 percent and this was significantly lower thanGhana,NigeriaandBenin.
The high and rising level of trade costs has generated intense academic and policy interest on the level and its impact on trade flows and economic integration. Higher trade costs are an obstacle to trade and impede the realization of gains from trade liberalization (see De [
Trade costs as argued by Obstfeld and Rogoff [
The high trade costs have been touted as one of the main determinants of the persistent low level of intra-regional trade in ECOWAS. In most ECOWAS countries, though tariff rates have fallen considerably over the years, the existence of numerous (uncontrolled) check points along the ECOWAS community’s highways and border points and various ports (airports and seaports) as well as the accompanying illegal charges contribute significantly to the costs of doing business in the sub-region. The bureaucracies and other indirect costs that are not policy induced, in particular, have been recognized to constitute the most significant hindrances to integration, trade and more importantly export supply response capacity of West Africa (see Alaba [
Portugal-Perez and Wilson [
Yet very little is known about the level and intensity of trade costs in ECOWAS countries and to what extent these costs are compared to other trade costs in other regional sub-groupings. No empirical study has been undertaken to estimate the level and extent of trade costs in ECOWAS. This paper therefore seeks to address this knowledge gap by estimating and analyzing intra and extra-regional trade costs of ECOWAS.
The remaining part of this paper is organized as follows. In the next section, we present intra and interECOWAS trade flows and the structure of ECOWAS exports as well as trade costs. Section three deals with literature review on trade costs and its measurement, with methodology and data description discussed on section four. We offer estimation and analysis of results on section five with conclusions on the last section of the paper.
Contribution of ECOWAS to global trade is very small. In terms of exports, ECOWAS account for less than one per cent of world merchandise exports. Marginalization of ECOWAS in global trade is also manifested in its very low share of intra-regional exports in its total exportsintra-ECOWAS’ share of total ECOWAS exports has been insignificant and have hovered around 9.2 per cent since 2005 though it increased marginally from 8.8 per cent in 2005 to 9.2 per cent in 2010. The EU and USA remains the major export destinations of ECOWAS exports. The EU and USA, on average, consumed about 57.8 per cent of ECOWAS exports compared with an intra-ECOWAS trade of 9.2 per cent for the period 2005-2010.
The poor performance of ECOWAS in global trade and intra-ECOWAS trade have been largely attributed to the high and rising cost of trade incurred in transporting and moving across borders1. For Lyakurwa [
The Doing Business [
time to export averaging 32 days and the time to import 38 days.
On average, overall delays at African customs remain longer than the rest of the world: 12 days in countries south of the Sahara, compared to 7 days in Latin America, 5.5 days in Central and East Asia, and slightly more than 4 days in Central and East Europe, adding a tremendous cost to importers each passing day at the custom’s warehouse (see ECA [
Trade costs2 include all costs (other than the marginal cost of producing the good) incurred in getting a good from the producer to the final user. It includes transportation, time and local distribution costs, border costs, institutional costs (i.e. legal and regulatory costs, foreign exchange costs), and informational costs (i.e. contract enforcement costs, communication cost).
Within the international trade literature two main sources of trade costs have been identified, namely direct sources or evidence and indirect sources or evidence. While the direct sources of trade costs are obtained from data obtained on costs imposed by tariff and nontariff barriers and by the environment (transportation, time cost, wholesale and retail distribution costs and insurance), indirect evidence has been obtained mainly through inference from trade flows3.
For almost five decades, trade economists have inferred unobservable trade costs from trade flows through economic models, mainly in the form of gravity equations. Originally borrowed from the Newtonian law of universal gravitation4, the gravity framework was first applied in economics by Tinbergen in 1962 to explain bilateral trade flows between two countries. Without much theoretical foundation, Tinbergen [
Following from Tinbergen’s [
According to Bergstrand and Egger [
Under the endowment-based conditional general equilibrium framework, trade economists have estimated two types of gravity equations namely, the “traditional” and “theory-based” gravity equations. The traditional gravity equation to infer unobservable trade costs following from Tinbergen [
where xij is the log of exports from i to j, yi and yj are the log of GDP of the exporter and importer, is a set of observables to which bilateral trade frictions/barriers are related and εij is the disturbance term.
Anderson and van Wincoop [
Anderson and van Wincoop [
where (3)
where xij is nominal exports from country i to j, yi and yj is the nominal income (GDP) of exporter i and importer j respectively, yw is nominal world income (total world GDP), tij is the bilateral trade costs, γ is the elasticity of substitution among goods, Пi and Pj are outward and inward multilateral resistance variables respectively. In addition is a set of observables to which bilateral trade frictions/barriers are related.
According to Anderson and van Wincoop [
where θi and θj is the share of world income of country i and j defined as and respectively. From Equations (4) and (5) bilateral trade costs tij are summed over and weighted by all destination countries j or origin countries i.
Both the “traditional” and “theory-based” gravity equations have continued to achieve empirical success in explaining bilateral flows6 and this explains why the gravity framework of trade is recognized as the workhorse in explaining bilateral trade flows. Most of the studies that have employed versions of either the “traditional” and “theory-based” gravity equations have sought to estimate various types of bilateral trade costs across countries and overtime.
The empirical validity of using gravity equations to measure trade costs and its impact on trade volumes has been criticised mainly as a result of the underlying theoretical assumptions. The criticisms that have come up relate to the omission of the non tradable sector in the trade cost function, symmetric assumption about outward and inward multilateral resistance, the inclusion of time invariant proxies and omission of important frictions to trade in the trade cost function. Attempts to address these criticisms have led to the emergence of a new strand of promising trade cost literature.
Engel [
The symmetric assumption underlying trade costs within the gravity model has also come under criticism because as indicated by Novy [
As indicated by Coe et al. [
Standard gravity equations (i.e. the traditional and theory-based) have also failed to capture all trade costs components because of lack of information and hidden transactions costs that have in most situations not been accounted for in capturing trade costs. This might explain why there is a missing trade flow component when predicted trade flows are compared with actual trade flows.
By building on Head and Ries [
The motivation for Novy’s approach was to overcome the drawbacks that were associated with the microfounded (theory-based) gravity framework by Anderson and van Wincoop [
In the light of these drawbacks, Novy [
By specifying the theory-based gravity equation in domestic trade terms and explicitly solving for the multilateral resistance variables and bilateral trade costs from the general equilibrium model, Novy [
where τij is the total trade cost (i.e. measures bilateral trade costs relative to domestic trade costs), tijtji is the bilateral trade costs of countries i and j and tiitjj is the domestic trade costs of countries i and j. The measure of the international component of trade costs net of distribution costs in the destination country is given as
.
This captures what makes international trade costly over and above domestic trade.
Intuitively, Equation (6) indicates that when bilateral trade costs decrease relative to domestic trade costs, total trade costs (τij) will decrease, making it easier for countries i and j to trade relative to domestic trade. This will therefore imply that bilateral trade flows will increase relative to domestic trade flows. Similarly, if bilateral trade flows increase relative to domestic trade flows, one can infer that it has become easier for the two countries to trade (possibly because bilateral trade costs have declined relative to domestic trade cost), and this will be reflected in a decline in total trade costs.
Novy [
Using a similar approach Novy [
The trade cost measures in Equations (8) and (9) are the same although (8) incorporates fixed costs of exporting (as discussed by Chaney [
The empirical approach adopted in this study is to estimate a trade cost equation to obtain the tariff equivalent trade cost measure for ECOWAS countries that expresses the trade cost parameters as a function of observable trade data, derived in (6) as
where τij is the tariff equivalent trade cost (i.e. measures domestic trade relative to bilateral trade), Xii and Xjj is the domestic trade of countries i and j respectively, Xij and Xji is the bilateral trade of countries i and j respectively, and σ is the elasticity of substitution.
Data for our analysis is obtained from two sources. Data for estimating the tariff equivalent trade cost measure will be constructed from the Trade and Production Database published by CEPII. Data for the second stage of analysis will be constructed from the COMTRADE database of the UN and it involves bilateral trade and tariff data for the period 1990-2009. The Trade and Production Database published by CEPII provide an updated version of the worldwide data used in Mayer and Zignago [
To meet the study objectives, the sector (ISIC rev 2) level bilateral trade and production data is aggregated to the country level. The database used for the study contains information on 13,174 bilateral country-years, covering about 128,000 observations for 24 years over 1980-2003. The analysis focuses on the production and trade in manufactures only.
In order to focus our analyses on Africa, we concentrate mainly on bilateral trade relations involving African countries. This leaves us with a final panel of about 3346 bilateral country-years covering 13,184 annual observations. With the final dataset, bilateral countries appear in only 7 years on average, making the dataset unbalanced. The use of unbalanced data partially allows bilateral countries to enter and exit the panel. The dataset also contains geographic information that allows us to divide the bilateral country-years into different economic blocs/regions. By this information, we will be able to carry out regional analyses, making it easier for us to identify the differences that exist between bilateral trading partners from different economic blocs/regions. Bilateral exports (Xij and Xji) (Gross Exports valued at F.O.B and denominated in thousands of US dollars) data used in this study are sourced from the CEPII database and UN COMTRADE. Domestic trade or internal flows for the exporting (i.e. Xii) and importing (i.e. Xjj) country is defined as total production minus total exports of manufactures. This is also denominated in thousands of US dollars and is sourced from the CEPII database.
The choice of a value for the elasticity of substitution (σ) is very important in the estimation of the trade cost measure. Since the trade cost measure derived in (10) is synonymous to the trade costs measure derived from other models (see Equations (7)-(9)), the choice of a value for σ will depend on values of different parameters used in the other models, namely the Fréchet parameter ϑ and the Pareto parameter γ.
Survey estimates of σ in Anderson and van Wincoop [
The results obtained in this section relate to our estimate of the tariff equivalent trade cost measure which is obtained from estimating Equation (10) with an elasticity of substitution set equal to 8 (i.e. σ = 8). A decline (an increase) in our estimate of the tariff equivalent trade cost implies that bilateral trade flows have increased (decreased) relative to domestic trade flows, and this would be as a result of a decrease (an increase) in bilateral trade costs relative to domestic trade cost.
The results in
$$ SSA Average = 2.715; *p < 0.10, **p < 0.05, ***p < 0.01; Standard errors are shown in parenthesis.
ing system and is about twice as high as those in highincome OECD countries. As shown in
To find out if the average trade costs across blocs differ significantly from the average trade costs of ECOWAS countries, the study conducted t-tests to test the null hypothesis that there is no statistically significant difference between the average trade cost of the various blocs and ECOWAS. The t-test results as shown in
With regards to trade flow involving ECOWAS countries, estimates of tariff equivalent trade costs obtained from estimating Equation (10) indicates that on average ECOWAS countries traded among each other at a lower cost than with other trading partners from economic blocs out of ECOWAS. This could be attributed to the positive impact of regional trade integration efforts. Over the years especially since 2000, ECOWAS seemed to have promoted intra-ECOWAS trade especially with regards to export of manufactures. For instance between 2000 and 2006, annual average intra-ECOWAS exports was valued at US $4.4 billion compared to the US $3.4 billion exports from ECOWAS to all trading partners between 1980 and 2003. The export diversification index (EDI)10 for ECOWAS has declined from 0.83 in 2000 to 0.77 in 2008 (see UNCTAD [
A test for the difference in means shown in
With regards to countries within ECOWAS, intraECOWAS trade costs with Cote d’Ivoire was the lowest at an average tariff equivalent trade cost of 138.5 percent and this was significantly lower than Ghana, Nigeria and Benin (as shown in
Estimates of ECOWAS country-specific bilateral trade cost shown in
Trade costs are enormous globally and West Africa in particular, empirical evidence on the extent of trade costs and its actual effect on trades in ECOWAS region have been difficult to measure. High and rising trade cost is having an adverse impact on trade within the sub-region. Given the importance of trade costs in affecting trade flow among nations, and low level of both intra-regional and inter-regional trade of ECOWAS member countries, a clear understanding of the trade costs and its level is very important in order to promote deeper integration of the economies across the region.
*p < 0.10, **p < 0.05, ***p < 0.01; Standard errors are shown in parenthesis.
$$Ghana’s Mean = 1.997; *p < 0.10, **p < 0.05, ***p < 0.01; Standard errors are shown in parenthesis.
*p < 0.10, **p < 0.05, ***p < 0.01; Standard errors are shown in parenthesis.
This paper seeks to empirically measure tariff equivalent of trade costs and its effect on trade in some ECOWAS countries. Our results indicate that over the period 1980-2003, the cost of trading within SSA was the highest at an average tariff equivalent of 271.5 percent. This finding confirms data from the World Bank’s Doing Business database which indicates that the trading costs in SSA, in general, is the highest within the global trading system and is about twice as high as those in high-income OECD countries. We also find that on average ECOWAS countries traded with their trading partners at a tariff equivalent trade cost of 268.2 per cent, higher than countries from other regional blocs within and out of SSA.
With regards to trade flow involving ECOWAS countries, estimates of tariff equivalent trade costs indicates that on average ECOWAS countries traded among each other at a lower cost than with other trading partners from economic blocs out of ECOWAS probably due to the positive impact of regional trade integration efforts and promotion of intra-ECOWAS trade especially with regards to export of manufactures since 2000. With regards to countries within ECOWAS, intra-ECOWAS trade costs with Cote d’Ivoire were the lowest at an average tariff equivalent trade cost of 138.5 per cent and this was significantly lower than Ghana, Nigeria and Benin. Relatively each of the ECOWAS countries traded at a lower intra-ECOWAS trade cost than with other blocs within and out of SSA.