In Gravity no Veritas: Dubious Trade Elasticiy and Weak Effects of Regional Trade Agreements in Africa

Fabien Candau (1) , Geoffroy Guepie (1)

1 CATT - Centre d'Analyse Théorique et de Traitement des données économiques

This article puts into question the use of the gravity equation to analyze RTAs in Africa. Both by surveying the field and by leading estimations (on the so-called "structural gravity equation", i.e. with bilateral fixed effects and individual-time effects), we find that the RTAs elasticity of trade are unreliable due to their unrealistic high level and/or due to their erratic change when additional controls are introduced. We thus use a general equilibrium model and analyze how results are affected by studying the effects of RTAs under different assumptions regarding these elasticities. We find that even with high level of RTAs elasticity, the effect of RTAs on welfare is small, in part in reason of trade diversion but more importantly in reason of the small share of trade in GDPs.

Domaines: Economies et finances; Économie et finance quantitative [q-fin]

Fabien Candau, Geoffroy Guepie. In Gravity no Veritas: Dubious Trade Elasticiy and Weak Effects of Regional Trade Agreements in Africa. 2018. ⟨hal-02625930v1⟩