Drivers of Bilateral Trade Flows between Tanzania and Kenya: An Augmented Gravity Model Approach

Abstract

This study examines the determining factors of bilateral trade flows between Tanzania and Kenya using an augmented gravity model. The study relies on secondary time series data obtained from decent international databases, including the World Bank, United Nations Comtrade, and International Monetary Fund, to ensure evenness, reliability, and equivalence. After the estimation, the empirical findings indicate that trade openness has a positive influence on trade flows, as a 1% increase in openness leads to approximately a 16.34% increase in trade, reflecting a strong and substantial effect of liberalisation on trade expansion. Similarly, Kenya’s GDP exerts a positive influence, with a 1% increase resulting in about a 13.06% rise in trade flows, highlighting the significant role of Kenya’s economic growth in driving bilateral trade. In contrast, Tanzania’s GDP shows a negative influence, where a 1% increase leads to a 4.26% decrease in trade flows, suggesting that domestic growth may reduce reliance on bilateral trade. Distance, unexpectedly, has a positive influence, with a 1% increase associated with a 2.46% rise in trade flows, indicating that improved connectivity and trade complementarities may offset distance-related costs. Based on these findings, the study recommends that Tanzania should enhance production in sectors that complement Kenya’s demand, particularly in industrial and manufactured goods, to benefit from Kenya’s economic growth. It further recommends promoting export-oriented industries, improving product quality, and strengthening trade promotion mechanisms to ensure domestic growth translates into increased trade. Additionally, both countries should sustain trade liberalisation through reduced tariffs, streamlined customs procedures, and harmonised regulations, while continuing to invest in transport infrastructure, logistics, and regional connectivity to improve trade efficiency and maximise bilateral trade potential.