The Role of International Trade Channel in the Transmission of U.S. Recessions into African Countries: Evidence from Nigeria

Abstract

This paper examines the role of international trade as a transmission channel of U.S. recessions into African countries, drawing inferences from Nigeria and using time series data spanning 1981 to 2019. The analysis involves investigating how the effects of U.S. recessions on Nigeria’s growth spread across time, with and without Nigeria’s international trade, based on an autoregressive distributed lag (ARDL) cointegration model. The main findings are: (i) When Nigeria’s international trade is not controlled for in the analysis, U.S. recessions do not have statistically significant negative effects on growth in Nigeria both in the short-run and long-run. (ii) When Nigeria’s international trade is controlled for, the recessions have statistically significant negative effects on growth via the trade channel, but only in the short-run and with a lapse of time. (iii) The positive effect of international trade on growth occurs in the long-run, while the recessions do not have statistically significant effects on growth in the long-run. The key policy implications of these findings is that U.S. recessions only affect the impact of international trade on growth in a typical African country in the short-run, in that in the long-run the country is resilient to the recessions and its trade is positively impactful. Therefore, to limit the effects of shocks from large economies such as the U.S. in the short-run and maximize the benefits of trade, African countries need to diversify their trade away from such economies by increasing intra-Africa trade. This requires better performance of Africa’s trade blocs (e.g. ECOWAS) and the coordination of per jure and de facto trade policies within the continent generally.