Relationship between services liberalization and total trade in manufactured goods

Abstract

This study focuses on examining the relationship between services liberalization and total trade in three manufactured goods for three EAC member countries. The study was motivated by the region‟s persistently low trade performance particularly in manufactured goods, periodical shortages in essential manufactured goods such as sugar, cement, wheat flour and the accompanied price hikes (EAC, 2010). Even though this has been attributed to the inefficiencies in the manufacturing sector, this study holds that services liberalization may be a plausible solution to this disturbing trend in the region. It‟s against this background that the study employed the Least Squares Dummy Variable (LSDV) regression model to analyse country level panel data of three manufactured goods (cement, sugar, wheat flour) and four trade supporting services (transport, telecommunication, financial and insurance) traded by three EAC members (Kenya, Tanzania, Uganda) over a period of ten years. Overall, the R-squared value of 0.890 in the regression results indicate that services liberalization explains about 89% of the changes in total trade in manufactured goods for the three EAC members. This result agrees with findings from previous studies such as Deardorff (2001), Blyde and Sinyavskaya (2007), Onyango (2009) and Bagumhe (2012) that suggest that services trade and liberalization plays a significant role in commodities trade performance. The regression results for transport services reveal a t-statistic value of 9.435500, coefficient of 0.271401 and P-value of 0.0000 which is significant at 5% level of significance indicating a positive and highly significant relationship between transport services liberalization and total trade in manufactured goods in the EAC. This means that a one billion US dollar increase in total trade in transport services leads to a 0.271 billion US dollars increase in total trade in sugar, wheat flour and cement in the EAC. Regression results for financial services also reveal a t-statistic value of 2.431095, coefficient of -0.592327 and P-value of 0.0233 which is significant at 5% level of significance indicating a significant but negative relationship between financial services liberalization and total trade in manufacture goods. This means that a 1 billion US dollar increase in total financial services trade leads to a 0.592 billion US dollars loss in total trade in sugar, wheat flour and cement for the EAC. Liberalization of services in an economy is not in itself a sufficient factor for increasing efficiency, competitiveness or improving trade performance as other factors might motivate these changes in the EAC economy (Blyde and Sinyavskaya, 2007). The study therefore recommends addressing infrastructural constraints particularly in transport and telecommunication services; addressing knowledge and skills deficiencies in trade supporting services, specifically financial and insurance services; and creating a conducive investment climate and business environment in the region