Trade Liberalization and Trade Balance The Case of Bangladesh

Abstract

The pace of Bangladesh's trade liberalization is criticized for being too fast
and has 'flooded" markets with goods from abroad, particularly from
neighboring countries which are hurting Bangladesh’s economy and
deteriorating its external balance. This paper examines these concerns and
investigates the impact of trade liberalization on the trade balance of
Bangladesh. Incorporating liberalization indicators, defined as shift dummy
variable in the standard trade balance model the paper seeks to answer the
question, “Does liberalization improve trade balance of Bangladesh?”
Using the time-series data of Bangladesh over period of 1973-2006, the
cointegration methodology is applied to estimate an error correction model
to find the relationship both in the short-run and in the long-run. The main
findings of a single cointegrating equation show a long-run stable
relationship between trade balance and the explanatory variables in the
model. The results also suggest convergence of the short-run dynamics
towards the long-run equilibria and it can be concluded that the trade
reforms towards openness has improved the trade balance of Bangladesh.