The Effect of Everything But Arms Trade Preference on the Exports of Ethiopia: Empirical Evidence Using Gravity Model

Abstract

International trade is generally considered as an integral part of growth and development effort of an economy. Granting non-reciprocal trade preferences to developing countries has been a common practice by developed countries in their foreign trade policy. Many developing countries have also participated in reciprocal regional trade agreements. This study examined the effect of Everything-But-Arms trade preference on the exports of Ethiopia using bilateral export data with 34 major trade partners including the EU-15 over the period 2001-2019. The random effect model was used to estimate the generalized gravity model. The estimation results revealed that the EU non-reciprocal trade preference to the least developed countries, which is EBA dummy, has a negative and significant effect on the export performance of Ethiopia. The country’s exports generally improve for a higher domestic production and trade partner’s income, but decrease for a higher trade partners’ population size, a longer geographic distance and common language sharing with trading partners. Thus, the country should work on easing domestic supply-side trade bottlenecks and promoting export diversification through auspicious investment climate for export-oriented value-added economic activities. This could help to ensure long-run global competitiveness and to effectively reap the trade opportunities of non-reciprocal trade preferences from developed economies, the EU in particular.