Canonical correlation analysis to model trade synchronization between trading blocs

Abstract

Regional economic integration has been adopted as a policy in different regions to respond to the challenges of globalization brought about by WTo. Kenya's trade liberalization policies of 1991 and liberalization of the other COMESA countries have opened up increasing scope for trade co-operation with the rest of the World, particularly with Europe. Development cooperation between the EU and the countries of COMESA is a precondition for their trade expansion. Canonical Correlation Analysis is used when we have two data sets which we believe have some underlying correlation. Hence, an attempt has been made in this project to study the trade synchronization between the two blocs in the framework of globalization using canonical correlation analysis. It has been observed that COMESA has been exporting mainly to EU countries in comparison to other industrialized countries like USA and Japan. Though COMESA countries are taking advantage with EU's offer of preferences and increasing their market access to EU, the region as a composite unit could not be benefited due to unstable trade policies. However, the possibility of trade integration between COMESA and EU could be identified due to intra trade relations leading to inter-trade thereby establishing a trade synchronization with a maximum canonical correlation.