The nexus between trade reforms and export diversification

Abstract

The current trade literature highlights the importance of trade reforms and export diversification as a major economic trajectory towards a sustained economic growth. A concentrated export basket is at risk of price volatility and small market size. The purpose of this study was to expose the connection that exists between trade reforms and export diversification. The objective was to determine the impact of tariff preferences and bilateral trade agreements (dummy variable) on export diversity. The study used secondary data covering South Africa, Zambia and Zimbabwe from 2000 to 2013. The data used was reported at the Standard International Trade Classification (SITC) one-digit level. The data was accessed from world-integrated trade solutions (WITS) database and World Bank’s world development indicators (WDI) database. A gravity model was estimated to analyze the relationship between trade reforms and export diversification. A positive relationship between trade reforms and export diversification was observed. A liberal economy has diverse active export lines compared to a closed economy and bilateral trade agreements also promoted export diversification. It was also found out that, the reduction in transaction costs as proxied by geographical distance increased the number and quality of exported products. In this study, it is suggests that Zimbabwe should consider policies that increase market access and confidence to other market players by signing bilateral trade agreements. Trade reforms should promote diversification of exports through increasing the market size and the range of products that are being exported. This will stabilize the terms of trade, make exports more competitive on the international market, and improve the countries balance of payment.