Examining the trade potential of the UAE using a gravity model and a Poisson pseudo maximum likelihood estimator

Abstract

When the United Arab Emirates (UAE) started exporting oil in 1962, it leveraged off the country's economy to emerge as one of the world's fastest-growing nations. Recently, however, worries about the vulnerability of the economy from shocks in international oil prices have effectuated a rapid transformation based on production and trade diversification. Trade agreements and liberalization policies turned the country into a regional trade hub. Given the recent changes in the economy's structure and the importance of trade for the UAE economy, we examine opportunities for the country to further expand trade. We use a gravity equation on 2002–2016 panel data and a Poisson pseudo maximum likelihood estimator to examine the determinants of trade and the trade potential. We compare the results obtained from a theory-consistent econometric approach for the estimation of gravity with the results obtained from past ‘intuitive’ approaches to gravity estimation and infer on the bias present. Results reveal that the UAE has exhausted trade potential with some of its major trading partners including many member countries of the GCC and PAFTA. However, potential for trade expansion exists with many other countries, including Japan and India that could dictate future policy efforts for trade expansion.