Discussion Paper No. 117 of 2010 on Liberalization of Services and Its Implications on Agricultural Trade in Eastern Africa Region

Abstract

This study analyses the effects of services liberalization on trade in agricultural commodities within the East African Community (EAC). Intra-EAC trade flows in agricultural goods are examined, as the region is frequently affected by food shortages despite its potential to produce enough food for consumption and export. If properly regulated, trade in services can significantly facilitate agricultural production as well as marketing and distribution, hence food security. The gravity model is used to establish the impact of trade in services on intra-EAC trade in maize, beans and rice in the EAC customs union. The rationale is that over and above removal of tariffs and other trade barriers, services are an important component of transaction costs. Thus, they influence patterns and volume of cross-border trade. Empirical results support the argument that trade in services positively influences agricultural trade in the EAC region. Specifically, an increase in trade in business, insurance, and communication services increases agricultural trade in the region. However, the impact is insignificant in the case of financial services, implying weaknesses in the entrenchment of financial institutions in rural agricultural activities and regulatory restrictions associated with provision of financial services. The study recommends removal of existing restrictions on services supply to complement the gains from liberalization of agricultural trade in the EAC region. This requires, among others, the establishment of a regional framework agreement on services that would guide orderly liberalization of the services sectors, taking into consideration the need to consolidate the envisaged gains of the EAC common market.