Assessing the impact of unilateral trade policies EBA and AGOA on African beneficiaries' exports using matching econometrics

• Published date: 01 October 2019
• Date: 01 October 2019
• Author: Zakaria Sorgho,Joe Tharakan
• DOI: http://doi.org/10.1111/twec.12842

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wileyonlinelibrary.com/journal/twec World Econ. 2019;42:3086–3118.

© 2019 John Wiley & Sons Ltd

Received: 4 July 2018

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Revised: 4 February 2019

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Accepted: 25 April 2019

DOI: 10.1111/twec.12842

ORIGINAL ARTICLE

Assessing the impact of unilateral trade policies

EBA and AGOA on African beneficiaries' exports

using matching econometrics

ZakariaSorgho1,2,3

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JoeTharakan1,4

1HEC‐ULg Ecole de Gestion de l'Universite de Liege, Liege, Belgium

2CEPCI,Laval University, Québec, Canada

3FERDI, Paris, France

4CORE,UCL, Louvain-la-Neuve, Belgium

KEYWORDS

African Growth and Opportunity Act, African trade, Everything But Arms, matching econometrics, non‐reciprocal

preferences agreements, treatment effects

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INTRODUCTION

‘By supporting growth and development around the world, trade has proved to be an essential tool

in tackling poverty [in order] to improve the lives of the poorest and most vulnerable, […] we can

better ensure that developing countries more actively participate in the global trading system and

reap the benefits that trade has delivered to so many in the recent past’. In this recent speech, World

Trade Organization (WTO)'s Director‐General, Roberto Azevêdo1 emphasises the fact that in-

creasing exports from developing countries to industrialised countries' markets is an essential ele-

ment to reduce poverty and promote sustainable development for the developing world. This is not

a new idea but dates from the first discussions within the United Nations Conference on Trade and

Development (UNCTAD) in the 1960s. Although there are other ways (e.g. Aid for Trade and

Technical Assistance) used by certain developed countries to address these needs of poor coun-

tries, the granting of unilateral trade preferences through non‐reciprocal preferential trade agree-

ments (NRPTAs) is still the main way developed countries help developing countries to increase

their exports.2

1 WTO Director‐General, Roberto Azevêdo's address at the 5th Global Review of Aid for Trade from 30 June to 2 July 2015

in Geneva, Switzerland.

2 In recent years, a growing number of NRPTAs have been granted to least developed countries, including emerging

countries, such as China, Chile, Brazil, India, Republic of Korea, Thailand and Turkey (Klasen, Martínez‐Zarzoso, Nowak‐

Lehmann, & Bruckner, 2016).

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The NRPTAs have legally been endorsed by the Generalized System of Preferences (GSP) adopted

in 1968 under the auspices of the UNCTAD.3 They are trade concessions through which industrialised

countries can grant preferential and non‐reciprocal access to their markets to developing countries.

Under the GSP, the NRPTAs are an exception to WTO principles of reciprocity and non‐discrimina-

tion (see Section 2 for details). The European Union (EU) and the United States (US) have granted

non‐reciprocal preferences to developing countries including African countries under their general

GSP programmes (respectively, called EUGSP and USGSP). In addition, the EU and the US have

signed in theearly 2000s, specific NRPTAs with certain developing countries beyond their standard

GSP programmes (henceforth SGSP). In Africa, exports from least developed countries (LDCs) have

duty‐free and quota‐free (DFQF) access to the European common market under the “Everything But

Arms (EBA),” and from eligible countries to the US market under the “African Growth and Opportunity

Act (AGOA).” The aim of these specific programmes is to boost the exports from beneficiary coun-

tries towards the market of donors. More than 15years after the implementation of EBA and AGOA,

the question is whether these SGP programmes have produced the desired effect on African exports.

The effectiveness of unilateral preference agreements (i.e. the NRPTAs) on the integration of de-

veloping countries in world trade is subject to debate. As pointed out in Ornelas (2016), results in

various theoretical and empirical papers raise serious doubts about the effectiveness of NRPTAs in

helping developing countries trade and growth. For African countries, despite being granted NRPTAs

since the 1970s, their share of exports is only 3% of world trade (WTO, 2015). In the debate on trade

and development, several voices criticise developed countries granting non‐reciprocal preference pol-

icies. They argue that “what the donor countries give with one hand, they take away with the other”

(Panagariya, 2005, p. 1279). For them, developed country subsidies and protectionism hurt poor coun-

tries, especially the LDCs, and they constitute the principal barriers to the development through trade

of Africa. Moreover, high costs of compliance with standards and strict rules of origin in developed

countries, especially for agriculture, limit the opportunities for developing countries to expand exports

of products for which they have a comparative advantage (Cirera & Cooke, 2015).

The weak integration of Africa into world trade could be explained by the rapid change of the

multilateral trading system (MTS) withthe WTO since 1995. Indeed, the successive rounds of trade

liberalisation (by lowing tariffs) in developing countries under WTO agreements, and the proliferation

of economic integration agreements (EIAs),4 including reciprocal trade agreements, around the world

reduce the preferential margin provided by non‐reciprocal trade policies towards the developing coun-

tries. This phenomenon, the so‐called “erosion of preferences,” has created concern in the developing

world, especially for LDCs, regarding the potential impact on their exports (Cirera & Alfieri, 2012).

Considering only reciprocal EIAs that have entered into force after the 1 January 1995 (date of the

establishment of the WTO), the data give a total of 254 EIAs notified (still in force) over the period

from 1995 to 2016 (Sorgho, 2018).5 On the other hand, the modest impact on trade of NRPTAs could

be explained by the underlying complexity of the preference regimes such as the rules of origin and/

or the beneficiaries' own trade policies. These rules of origin are complicated and burdensome to ex-

porters in least developed countries (see De Melo & Portugal‐Perez, 2013).

3 The idea of GSP was presented during the first conference of the UNCTAD in 1964 in Geneva (Switzerland) and adopted

during the second one in 1968 in New Delhi (India).

4 There are free trade agreements, one‐way and two‐way preferential agreements, custom unions, and bilateral or multilateral

consultative frameworks. To avoid linguistic infelicities, we refer to all of them as EIAs.

5 Data from WTO Database, http://rtais.wto.org. for reciprocal trade agreements. For an idea on the proliferation of NRPTAs

notified at the WTO, see: http://ptadb.wto.org/ptaLi st.aspx (accessed 8 November 2017).

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In contrast to the existing literature on the impact of NRPTAs, this paper seeks to assess the

long‐run average impact of the NRPTAs on African exports by using a methodology which allows

usto reveal and address for the non‐random nature of NRPTAs (i.e. the endogeneity of NRPTAs). To

the best of our knowledge, previous studies assume implicitly the endogeneity of NRPTAs without

showing the evidence of the endogenous nature of NRPTAs. Using data from 1996 to 2015, we inves-

tigate whether, and in what magnitude, both EBA (provided by the EU) and AGOA (provided by the

US) trade policies have affected the exports of beneficiary countries from Africa attempting to reveal

how these NRPTAs are endogenous. Through a matching approach, our paper explicitly deals with

the endogenous nature of NRPTAs before evaluating the trade effect of NRPTAs (EBA and AGOA)

on beneficiary countries (i.e. the estimation of ATT). Moreover, in contrast to previous studies on

NRPTAs which evaluate the impact of NRPTAs on beneficiaries in comparison with non‐beneficia-

ries, our study assesses the ATT of NRPTAs on beneficiaries' exports, that is, an impact evaluation

on NRPTA‐beneficiary country compared to themselves without NRPTAs (a counterfactual analysis).

This paper also contributes to the literature on the assessment of the trade impact of EIAs by pro-

posing a way to carry out the matching in the case of unilateral trade policies. As discussed in Section

3, we use a difference‐in‐difference (DiD) matching estimator for the empirical analysis of EIA treat-

ment effects in order to deal with the fact that trade policy is endogenous (e.g. Baghdadi, Martinez‐

Zarzoso, & Zitouna, 2013). With the matching method, a sample of units that did not receive the

treatment but that are comparable with respect to all observed covariates to the units that did receive

the treatment is created.6 In contrast to previous studies on the trade (or environmental) impact of trade

agreements—that include all types of EIA and consider the bilateral gravity covariates for the match-

ing procedure—our paper shows that this does not work in the case of NRPTAs (unilateral trade pol-

icies). The matching validity tests are violated using bilateral covariates proposed in the literature. We

show that other covariates can be used to perform the matching in this case. We then estimate the ATT

of the AGOA and EBA policies on exports of African countries.

The results from logistic models show that economic (e.g. better economic regulation) and politi-

cal (political stability) characteristics increase the probability to be eligible in the AGOA programme

(granted by the US). They also show that a good level of freedom of expression increases the probability

to benefit from EBA while a high level of human development (including education and health) nega-

tively determines granting this policy by the EU. To obtain the average effect of NRPTAs on the trade

of beneficiary countries, we run regressions on the “matched sample,” defined as the observations in

the NRPTA‐treated group plus the observations in the control group which were matched to them. This

empirical approach which combines the matching method for dealing with the selection problem and

fixed effects (FE) to address for any unobservable factors provides robust estimates of ATT of NRPTAs.

Our main results show that, fifteen years after enforcing both policies, the policies of AGOA and EBA

have allowed beneficiaries' to increase their market share in donor's market. However, our results show

that the AGOA programme has had a larger impact on African beneficiaries' exports than the EBA initia-

tive. These ATT results are consistent and robust as we carry out a sensibility analysis as well as matching

validity tests. The findings of this paper have significant policy implications discussed in Section 5.

The rest of the paper is organised as follows. Section 2 provides a background of GSP and especially

the NRPTAs from the US and EU towards African countries. Section 3 reviews previous studies and

explains the contribution of our study. Section 4 describes the methodology used to estimate the average

treatment effect on treated (ATT) of NRPTAs membership on exports and presents the data. Section 5

discusses the main estimation results and implications. Finally, we provide a conclusion in Section 6.

6 In our analysis, we check whether any hidden heterogeneity influences our estimates of the trade impact of the unilateral

policies (NRPTAs).