Effects of multilateral and preferential trade policy reform in Africa: The case of Uganda

Abstract

This paper estimates the effects on production, trade and economic welfare of current trade policy regimes throughout the world on Uganda relative to other economies. This will be a benchmark against which to examine various multilateral and preferential trade policy scenarios that might emerge over the next decade as part of the WTO's Doha Round and from the expected move later this decade towards Economic Partnership Agreements with the European Union. The results suggest modest gains or worse for Uganda, in part because it already has low tariffs and ready preferential access to rich-country markets. Several important caveats to this type of analysis are stressed though, before drawing out some trade and policy implications for Uganda.

Key Words:

• Trade policy reform
• multilateral negotiations
• preferential trade
• computable general equilibrium
• developing countries

Acknowledgments

This article is a revision of a background paper for the World Bank's Ugandan Trade Diagnostics Integration Study of 2006. The authors are grateful for helpful referee and editor comments. The views expressed are the authors' alone and not necessarily those of the World Bank, its Executive Directors, nor the countries they represent.

Notes

The results would be different if unemployment were present and changed as a consequence of the shocks considered, as discussed in the seventh section below.

For the sake of simplicity the fiscal balance is fixed in US$ terms at the base year level, minimizing potential sustainability problems; but this implies they decrease over time as a percentage of GDP for expanding economies.

More information on the MAcMaps database is available at http://www.cepii.fr/anglaisgraph/bdd/macmap.htm.

These data do not include informal trade with neighboring countries. According to Walkenhorst (2005: 7), informal exports to Uganda's five neighbors (mostly to DR Congo and Kenya, but also to Rwanda, Sudan and Tanzania) comprised as much as half its formal exports. In the case of imports, however, the informal component was only about 5 per cent of formal imports. Informal refers to trade by unregistered businesses that are not subjected to import and value-added taxes, and it is not recorded other than unofficially via occasional surveys as in late-2003/early 2004. In the model results reported below, informal trade is not included.

In January 2005, Uganda began implementing with Kenya and Tanzania the East African Community (EAC) customs union, involving a common external tariff (CET). The average CET exceeds Uganda's average tariff as of that date (Walkenhorst, 2005: Table 4), so is likely to involve a raising of protection in Uganda (especially for processed food, textiles and clothing) and a diversion of its trade to its neighbors (as forecast by DeRosa et al., 2002). Uganda is also a member of the 19-country COMESA bloc, formed in 1994 as a preferential trading area, but COMESA has yet to proceed with its plans to establish a customs union. Since the CET being contemplated by COMESA is also much higher than Uganda's average tariff, it too would likely lead to a welfare-reducing trade diversion for Uganda. Neither of these areas is explicitly modeled in this paper, however, because neither COMESA nor EAC looks like being the grouping within which Uganda and its neighbors will negotiate an EPA with the EU. Instead, there are currently two other overlapping groups that have begun to form, of which Uganda is a member of only one but Tanzania is choosing to negotiate with the other (Walkenhorst, 2005: 27).

For more discussion of this issue of elasticity choice, particularly of Armington elasticities, see Valenzuela et al. (2006).

Evidence that the preference margin is often eroded by complex rules of origin, and that the rent is shared between importing and exporting countries with the latter getting less the more trade is concentrated on standard commodities, can be found in Olarreaga and Ozden (2005) and Ozden and Sharma (2004).