TRADE COSTS AND BILATERAL TRADE FLOWS BETWEEN NIGERIA AND ITS MAJOR TRADING PARTNERS

Abstract

Countries manipulate both domestic and international trade costs to promote their trade competitiveness in the global trade arena. High trade costs contributed to poor Nigeria’s global trade shares in 2005 to 2016 (e.g. 2005 – 0.004, 2010 – 0.004 and 2016 – 0.002), resulting in its low competitiveness in international trade. Previous studies analysed the impact of elements of either Domestic Trade Costs (DTCs) or International Trade Costs (ITCs) on trade flows. This study was designed to examine the relative impacts of ITCs and DTCs on bilateral trade flows between Nigeria and its major trading partners.

A modified Heckscher-Ohlin Neo-classical Trade Theory incorporating trade costs as determinants of bilateral trade flows provided the framework. An augmented Standard Gravity Model that featured variables for ITCs (tariff, real effective exchange rate and maritime transport) and DTCs (ratio of road transport to total population, institutional quality, required number of documents, time and costs to export and import) was used. Panel instrumental variables method (pooled two-stage least squares technique leveraged on fixed and random effects models) in conjunction with fixed effects Poisson Pseudo Maximum Likelihood was used for analysis. Both aggregate and disaggregated (agricultural, manufactured and extractive goods) trade data for the 2005–2016periodwere analysed. Data were sourced from World Development Indicators, World Integrated Trade Solution, Worldwide Governance Indicators, and United Nations Conference for Trade and Development Statistics databases. All estimates were validated at α≤ 0.05.

The results from the aggregate analyses reveal that Nigeria’s export was promoted by own and trading partners’ institutional quality (z=3.74, z=2.14), own and partners’ ratio of road transport to population (z=2.70, z=2.72), while own institutional quality and ratio of road transport to population (z=2.51, z=4.11) promoted import. For Agricultural export, time to export in Nigeria (z=-2.51), Nigeria and trading partners’ maritime transport (z=-3.17, z=3.84), and Nigeria and trading partners’ institutional quality (z=4.07, z=2.47) had significant impact. For manufacturing export, time and cost to export a container in Nigeria (z=-3.15, z=-2.15),Nigeria’s maritime transport (z=-3.22), and Nigeria and trading partners’ ratio of road transport to population (z=-2.75, z=-2.00)had a significant negative impact, suggesting a poor state of infrastructures in Nigeria. For agricultural and manufacturing import, Nigeria’s maritime transport (z=-6.51, z=-2.10), Nigeria’s institutional quality (z=-4.26, z=-2.72), Nigeria’s ratio of road transport to population (z=-6.48, z=-2.52) and time to import in Nigeria (z=-6.57 and z=-2.10) showed a significant negative impact. The differential impact ratio of DTCs components on aggregate, on the average, in agricultural, manufacturing and extractive exports constituting (57.5%, 63.5%, 74.0% and 62.0%)was higherthan the ITCs (42.5%, 36.5%, 26.0% and 38.0%), respectively. Also, the differential impact of DTCs components on aggregate in agricultural, manufacturing and extractive imports, accounting for 52.3%, 52.0%, 62.0% and 61.0%, was higher than the ITCs component (47.7%, 48.0%, 38.0% and 39.0%), respectively.

Domestic trade costs substantially affected the competitiveness of Nigeria’s trade for the 2005-2016 period. Therefore, improvement in institutional quality, trade-related infrastructures,as well as regulatory environmentconducive to doing business, would produce significant trade gains for the Nigerian economy.