Factors Affecting Uganda's Bilateral Trade Flows: An Application of the Gravity Flow Model

Uganda is a fast growing economy with many sources of foreign exchange most especially from agricultural trade exports. However, no information about Uganda’s bilateral trade flows has been documented using the gravity flow model yet this model lies at the centre of explaining any country’s bilateral trade flows. Identification of Uganda’s bilateral trade flows can suggest a desirable free-trading partner and conjecture the volume of a missing trade or unrealized bilateral trade flows. Although Muhammed and Andrews (2008) have employed the gravity flow model in Uganda, no work has been done to assess the determinants of Uganda’s bilateral trade flows and potential. However, a detailed understanding of Uganda’s bilateral trade flows would provide an additional practical framework for derivation of informed trade policy decisions to improve the country’s trade regime. It is against this background that the Augmentedgravity flow model was employed to study Uganda’s total bilateral trade flows and her trade potential. The main objective of this study was to explore the determinants of Uganda’s total bilateral trade flows and her predicted trade potential. Specifically,(i) to determine the factors that influence total bilateral trade flows between Uganda and her trade partners, (ii) to predict Uganda’s bilateral trade potential and performance and iii) to determine Uganda’s degree of trade integration with her major trade partners. Time series data of Uganda and her major trading partners (Switzerland, Netherlands, Belgium, UK, France, South Africa and Kenya) were used for the period 1970 -2006. The study employed real GDP, Distance, real exchange rate volatility, real exchange misalignment, membership to COMESA, membership to the East African Community (EAC) and having had a common colonial master as the explanatory variables with 259 observations. Feasible Generalised Least Squares (FGLS) estimation, Relative difference x (Rd) and Absolute difference (Ad) indices, as well as the ratio of actual to potential total bilateral trade flows were the analytical tools employed to achieve the set objectives. Empirical findings reveal that Uganda’s total bilateral trade flow is positively influenced by Uganda’s real GDP, real GDP of her trading partners, membership to COMESA, membership to the EAC and having had similar colonial masters. On the other hand, distance, population of Uganda and that of her trade partners, real exchange rate volatility and misalignment showed a negative influence on Uganda’s total bilateral trade flows. Generally, Uganda has a good trade performance and can easily be integrated in trade. However, there is still need to promote export trade and invest generously in public infrastructure among others in order to improve her trade performance. Results also reveal that Uganda has a high degree of trade integration (111.09 percent) with most of her trading partners but she cannot easily integrate with UK and France markets specifically. The lower level of trade integration with UK and France is associated with the high non-tariff trade barriers as well as large distance between Kampala and the respective capital cities.