Ethiopia’s Bilateral Trade Relation with China, India and Eu: Analysis of Trends and Determinants

Abstract

The study analyses trends and determinants of Ethiopia’s trade relation with emerging Asia giants China, India and its traditional partner- EU for its total trade flows. It uses secondary data of two decades (1997-2016) from official sources with the purpose of examining the growing difference in the level of importance between its emerging and traditional partners and identifying major governing factors for the strategic relationship between the bilateral pairs. Gravity Model and fixed effects estimation technique is used for the analysis. Major explanatory variables for Ethio-India trade include: GDP size of a foreign partner and Per-capita of Ethiopia governing the relationship positively whereas the increase internet access in Ethiopia resulted in declining trade with India. Ethio-China trade was explained positively by per-capita of Ethiopia, foreign partner’s population size and Ethiopia’s GDP growth rate and negatively by terms of trade between the partners and the debt service expenditure amount in Ethiopia. In the way, Ethio-EU trade is explained positively by GDP of a foreign partner, GDP of Ethiopia, the terms of trade and government expenditure and negatively by increase in the population size of a foreign partner (EU) in this case. Hence, gravity model variables such as GDP and population size have affected the trade flow between partners.