Revisiting the Determinants of Bilateral Trade Flows with evidence from Tanzania: A Gravity Model Analysis.

Abstract

International trade is regarded as a powerful engine and enabler of the global economy as well as an important tool for economic development. This has led countries to implement export – led economic growth strategies through bilateral and multilateral trade relations. Tanzania as one of the countries in this stance has established bilateral trade relations with her trading partners. However, to date there are scant and mixed results on what determines bilateral trade flows. This paper aimed at examining the determinants of bilateral trade between Tanzania and its major trading partners. Panel data spanning from 1996 – 2019 covering 7 countries was used. Gravity model was used as a tool of analysis and was estimated using a random effect model. Results show that GDP exhibits both a U-shaped and an inverted U-shaped relationship with trade flows as opposed to existing literature. Population size, quality of institutions, and common language positively and significantly affects trade flows while membership to the East African Community and landlocked country reduces the volume of trade flow. The results imply that to improve bilateral trade between Tanzania and its trading partners, investments that boost GDP, quality and strong institutions, the use of common language and a well-developed infrastructure are vital.