Determinants of Tanzania and Kenya Trade in the East African Community: A Gravity Model Approach

Abstract

The paper aims at studying the determinants of trade in the East African Community (EAC). The paper explains as to why despite having five members, the two countries Kenya and Tanzania dominates trade among EAC members.Using the aggregated gravity model, the study finds that, Tanzania and Kenya Trade are much determined by the economic size (GDP) of the EAC members rather than the Per capita GDPs of these countries. The coefficient of a distance variable has negative impact meaning the costs of trading, time related costs and costs related to market access are higher.

In a disintegrated model, the economic size of the respective countries, Kenya and Tanzania,exerts a positive impact but Tanzania’s GDP have a higher value of coefficient than Kenya.  The Tanzania’s importers GDPs coefficient is positive but not significant for Tanzania, while it is positive and significant for Kenya’s export Trade. Importers population showed a remarkable contribution to bilateral trade between Tanzania, Kenya and the rest of EAC. However, per capita income coefficient explains that Kenya and Tanzania does not trade high income oriented products for the coefficient had a negative sign which is significant. The distance, representing the cost of trading, is affects Tanzania export negatively more than how it does for Kenya. The exchange rate coefficient shows that price competition is important because for Tanzania lowering her currency does not half the export as if Kenya would do. Openness variable shows trade liberalization, perhaps the formation of EAC bloc;measures have significantly improved trade flows between EAC countries.

Keywords: Gravity model, export oriented economy; Regional or Free Trade Agreements; production’s specialization and competitiveness