The Determinants of bilateral trade between African countries based on regional trade agreements

Abstract

Regional trade agreements are formed by nations in order to integrate their economies, liberate trade among members, and to facilitate the free movement of goods, factors of production and other resources across territorial borders based on the GATT/WTO framework. African regional trade agreements are particularly designed to foster socio-economic development and integrate African economies in to the global trading system. However, the level of trade transaction within and across regional economic communities in Africa is low when compared to other trade agreements in the world. Thus, this study aims to know the determinants of bilateral trade between countries in Africa based on regional trade agreements. The theoretical model for the study was the gravity model which has been widely used to estimate bilateral trade flows between trading partners based on economic size, population and distance between two countries. The study made use of longitudinal research design with data obtained from the IMF direction of trade statistics, World Bank and CEPII. A total of 53,040 observations of bilateral trade flow covering 52 African countries over a period of 20 years. The data was analyzed using the STATA software statistical package. The results of the data analysis from the pooled OLS revealed that income, population, common official language and border are all significant determinants of bilateral trade among countries. Also, the membership in RTA was found to have positively statistically significant impact on trade flows. In contrast, the fixed effects results do not show significance for some of the variables including participating in a trade agreement. The study concluded that RTAs in Africa lacks the institutional capacity to promote international trade among its member countries. This is mainly due to the lack of complementarity in their economies and the security concerns that hinders trade lows across border. It was recommended that countries should be encouraged to diversify their economies and broaden the trade agreements within them to allow free flow of factors of production.