Lasting trade agreements are generally those that generate evenly distributed gains. When agreements involve countries with large differences in natural resource abundance, evidence shows that gains are unevenly distributed and agreements are short-lived (World Trade Report 2010).
Tony Venables (2011) explains this phenomenon by the reluctance of resource-abundant countries in the developing world to enter these type of schemes, as they involve income redistribution from resource-rich to resource-poor countries. Indeed, resource-rich countries in the south tend to have a relatively concentrated production bundle limiting their capacity to export non-resource-intensive goods to preferential partners. On the other hand, non-resource-abundant countries will tend to have a more diversified production bundle and the regional agreement may then offer the possibility to diversify their exports.
Trade agreements would then tend to be trade-creating in the resource-poor countries, but may be trade-diverting in resource-rich partners. Indeed, the preferential access granted to the resource-poor country exporters will allow its producers to export labour-intensive products at a higher price to the resource-rich partner, helping the former diversify their export basket, and perhaps break into global manufacturing production chains. These gains will be made at the cost of resource-rich partners.
Regional integration schemes among Middle East and North African (MENA) countries provide an ideal case study to systematically test for the importance of trade diversion in agreements involving resource-rich and poor members. The Pan-Arab Free Trade Area (PAFTA) is particularly interesting as it involves eight resource-poor countries and twelve resource-rich countries according to the World Bank’s classification1. Other agreements such as the Gulf Cooperation Council (GCC) only involve resource-rich countries, and the Agadir Agreement only resource-poor countries. Thus, the same forces behind trade diversion are not at play. PAFTA is also one of the well-functioning trade agreements in MENA. As argued by Hoekman and Zarrouck (2009), intra-PAFTA trade barriers have substantially declined since the entry into force of the agreement in 1998.
In recent research (Carrère et al. 2012), we use a classic gravity model to explain bilateral trade patterns of each MENA country during the period 1990-2009. We find strong evidence of increases in intra-regional trade in PAFTA and in other agreements signed between MENA countries and partners in the rest of the world, such as Euromed. However, evidence of trade diversion was only found in PAFTA. Moreover, within PAFTA only resource-rich countries experienced trade diversion benefitting resource-poor countries. This is consistent with Venables’ prediction (Venables 2011).
The heterogeneity in the extent of trade diversion within PAFTA is illustrated in Figure 1 below which plots the percentage change in imports from the rest of the world (trade diversion when negative) due to the implementation of PAFTA as a function of the pre-PAFTA concentration of exports (higher Herfindhal concentration index and lower number of export products). Note that countries with the highest level of export concentration (Yemen, Kuwait, Oman, Libya, United Arab Emirates, and Saudi Arabia) are all resource-rich countries as previously argued. These countries experienced the highest levels of trade diversion with an average decline above 20% in imports from the rest of the world.
Figure 1. Non-fuel trade diversion
Exports Herfindahl concentration
Number of exported products
Source: Carrère et al. (2012)
Putting together these results suggests that the main beneficiaries from PAFTA were resource-poor countries that experience only trade creation and benefit from the trade diversion suffered by resource-rich countries. Thus, PAFTA has helped redistribute income from resource-rich to resource-poor countries. Our results also explain why resource-rich countries may be reluctant to enter into these types of agreement with resource-poor countries. Indeed, there are certainly more efficient means of redistributing income to resource-poor countries than through trade diversion. Future discussions of regional trade agreements should take this into account.
Carrère, Céline, Julien Gourdon and Marcelo Olarreaga (2012), “Regional Integration and Natural Resources : Who benefits? Evidence from MENA”, Policy Research Working Paper 5970, The World Bank.
Hoekman, B and J Zarrouk (2009), “Changes in Cross-Border Trade Costs in the Pan-Arab Free Trade Area, 2001-2008”, Policy Research Working Paper 5031, The World Bank.
Venables, A (2011), “Economic integration in remote resource-rich regions”, in R Barro and JW Lee (eds.), Costs and benefits of economic integration in Asia, Oxford University Press.
World Trade Report (2010), Trade in Natural Resources, World Trade Organization, Geneva.
1According to World Bank’s classification resource poor countries in PAFTA include Tunisia, Morocco, Lebanon, Jordan, Egypt, Sudan, West Bank of Gaza and Djibouti. Resource rich countries can be divided into two sub-categories. GCC Oil exporters include UAE, Saudi Arabia, Qatar, Oman, Kuwait and Bahrain. Developing Oil Exporters include: Yemen, Syria, Iran, Iraq, Libya, and Algeria.