Do competition regimes matter in international trade? a case study of the Tripartite Free Trade Area.

Abstract

This thesis assesses the importance of competition policy and competition reforms in enhancing regional and continental integration processes. While using the envisaged Tripartite Free Trade Area (TFTA) as a case study, it assess competition reforms in the individual countries as well as bilateral trade flows between the countries that would become members of the TFTA. As strides are now being made towards continental integration, the role that competition policy adoption and enforcement can play in enhancing benefits from the integration remains largely unexplored. The thesis’s objectives were threefold. Firstly, it aimed to demonstrate the need for competition reform to be part of the discussions on regional integration at the level of the envisaged TFTA by showcasing how existing bilateral trade flows between the countries were influenced by competition reforms in the countries. Secondly, the study investigated whether the existing competition regimes in the countries that would form the TFTA reflect a general belief in competition policy. Thirdly, it aimed to assess whether changes in levels of economic development over time within the African context, as reflected by members of the envisaged TFTA, influenced decisions to tighten competition regimes. An index, the Competition Reform Index (CRI), which quantitatively measures the strength of competition regimes, was designed to assess the level of acceptance of the competition reform agenda among the countries constituting the TFTA. Such acceptance is inferred based on univariate methods, specifically how the levels of the mean CRI, the standard deviation of the CRI and the maximum CRI score, have evolved over time. CRI data for 23 countries over the period 1998 to 2018 is used for this purpose. The manner in which competition reforms impact international trade was estimated using panel data models, with a measure of the strength of competition regimes included among the explanatory variables. More specifically, the gravity models of international trade were estimated through random effects panel data models and Generalised Methods of Moment (GMM) models, using bilateral country exports and imports for countries that would be part of the envisaged TFTA. The estimation for the random effects and GMM models was over the period 2001 to 2016 across 20 countries1 that would all be part of the proposed TFTA. The extent to which adoption of competition reforms in the envisaged TFTA could have been the result of changes in economic performance in these countries was estimated using panel Granger causality methods, for 23 countries over the period 1998 to 20182. More specifically, the study estimated the extent to which changes in Gross Domestic Product (GDP) levels in the proposed TFTA countries Granger cause changes in the CRI. The mean score of the CRI shows that although only 20% of the countries in the TFTA have not yet embraced competition reforms, few countries have been subjected to high quality competition regimes for a long period of time. The standard deviation of the CRI reflects some attempts to improve competition reforms over time in the region, although only 44% of the countries in the TFTA have high quality competition regimes. This confirms earlier studies that showed that some competition laws were adopted among the countries in the envisaged TFTA, but were designed to ensure that other public interests are not compromised. The study established that tightening competition reforms in the exporting country, reflected in an increase of 1% in the competition reforms variable will, on average, result in bilateral exports increasing by between 0.1% and 0.16%, holding other influencing variables constant. However, if the importing countries increase their competition variable by 1%, an average short-run decrease of 0.46% in bilateral exports would be expected, holding other things constant. With respect to imports, the results show that bilateral imports among countries in the proposed TFTA will increase by between 0.07% and 0.18% if the exporting countries increase their competition reforms by 1%, holding other influencing variables constant. The findings from the Granger causality tests of panel data do not produce statistically significant evidence that there is short-run causality from GDP to CRI. However, in the long run, this relationship is statistically significant. There are three major implications of these findings. Firstly, there is still room for countries to improve their competition regimes and enjoy more benefits from regional integration within the envisaged TFTA. Second, competition reforms should be enhanced in a quest to promote regional competitiveness and ultimately, global penetration rather than bilateral trade within the TFTA. This is due to the fact that an increase in bilateral exports in the TFTA is only apparent if other countries are lagging behind in competition reforms. Thus, if all countries in the TFTA were to adopt competition reforms, this added advantage would be neutralised. Third, the absence of short-run causality between GDP and competition reforms implies that regulatory capture and vested interests, which are characteristic of countries with low levels of development, are no longer a significant obstacle in the TFTA. This is encouraging from a policy perspective, as efforts to promote competition reforms at regional level can be continued across all countries with little fear of country vulnerability to capture by business and other vested interests.