Analysis of Bilateral Trade in UEMOA: The Implication of Trade Effects

Abstract

This study evaluated the implications of trade effects on bilateral trade analyses drawing evidence from UEMOA. Consequently, it provided three main innovations: augmentation of the gravity model (GM hereafter) to include Kelejian et al (2012) type of trade effects, among others; employed a more generalised GM proposed by Salisu et al. (2012) which accounted for all possible dimensions of trade effects; and examined the implications of ignoring these effects on bilateral trade models. Like the previous literature, it showed that economic size, geographical and political factors were the major drivers of bilateral trade in UEMOA. In addition, following from the augmented GM, it noted that UEMOA was trade creating. Contrarily, the results from the generalised GM revealed that UEMOA was trade diverting. Based on the diagnostic tests, the latter evidence seemed more reliable than the former. Therefore, ignoring these dimensions of trade effects in bilateral trade analysis when they exist may yield biased and inconsistent results.2

Keywords: Trade, Gravity model, UEMOA, Trade creation, Panel data

JEL Classification: F15, F33, C23.