Trade Potential of Afghanistan with European Union: A Gravity Model Approach

The notion of international trade and its impact on economic growth has been phenomenal. Thus, countries to reap the trade dividends diversify their trade destinations. Against this backdrop, this study investigates the trade potential of Afghanistan with the European Union by applying the gravity model of international trade. The study used panel data for five years, from 2015 to 2019. The gravity model has been further augmented by adding GDP per capita, population, real exchange rate, inflation rate, and openness of the partner country. The co-efficient of the gravity model has been used to estimate the trade potential of Afghanistan with the European Union. The analysis used the gravity trade model, satisfying the OLS assumptions. The data revealed that Afghanistan’s bilateral trade with the EU is positively and significantly affected by its GDP, GDP per capita, exchange rate, population, inflation rate, and employment openness. The results indicate that Afghanistan has trade potential with ten European Union countries. The study's results satiate that out of the chosen fifteen countries of the European Union, the magnitude of Afghanistan's trade potential is high with three EU countries (Germany, followed by France, and Spain). The trade potential also exists for seven other countries: Sweden, the Netherlands, Belgium, Austria, Poland, Ireland, and Italy. Afghanistan is close to its trade potential with Finland and Denmark. Whereas in the case of Romania, Latvia, and Greece, Afghanistan does not enjoy any trade potential. The findings of this study are intended to help the Afghan government and traders estimate Afghanistan's trade future and consistency in European Union markets, as well as to determine whether the Afghan government can sustain its trade with those countries.