Determinants Of Bilateral Trade Between Ethiopia And Major Trading Partners

Abstract

Due to different resource endowments, countries in this world are engaged in international trade in order to achieve their mutual benefits. However, making trade with other countries is not an easy task. This study investigates determinants of bilateral trade of Ethiopia with major trading partners. The study employed a panel data; by including 10 major trading partners of Ethiopia and a period between 1996-2020. The study used gravity model of international trade. In order to estimate the model, the study employed Pooled OLS, fixed effect, and random effect techniques. Fixed effect technique was selected after conducting appropriate tests. The result of this study suggests that Ethiopia GDP and population have a positive and significant effect on bilateral trade. Similarly, the GDP and population variable of the trading partners has a positive contribution to trade flows. However, distance affect bilateral trade negatively, and it is statistically significant. Therefore, the country should increase the production capacity so as to promote export. Ethiopia should continue to be engaged in free trade agreement.