Trade Openness and Disaggregated Import Demand in East African Countries

Abstract

Despite the well-known gains from trade, the effects of trade openness are a priori ambiguous. For this reason it’s important to establish effects of trade openness on both aggregate and disaggregated import demand. This study sought to establish the effects of trade openness on disaggregated imports. A panel data cointegration technique that uses the Fully Modified Ordinally Least Squares and Dynamic Ordinally Least Squares was employed. The data are annual cross country panels of EAC countries covering the period 1994-2012. The data were obtained from the IMF’s International Finance Statistics, the World Bank’s World Development Indicators as well as the World Integrated Trade Solution. The findings on the effects of trade openness on import demand show that an increase in the tariff rate reduces imports both at the aggregate and disaggregated levels. An increase in income positively influences the aggregate and disaggregated levels of imports. An increase in prices positively influences the aggregate and disaggregated levels of imports. Exports positively influence the aggregate and disaggregated levels of imports. Lastly the real effective exchange rate negatively influences aggregate and disaggregated imports. The policy implications is that governments of EAC countries could use trade openness reforms, particularly the tariff rate to minimize the importation of goods that can be produced locally, this will help in managing the balance of trade.