Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.5, No.4, 2014 13 Determinants of Tanzania and Kenya Trade in the East African Community: A Gravity Model Approach Benedict K. Mahona * ,Godwin D. Mjema Department of Economics, Institute of Finance Management, P. O. Box 3918, Dar es Salaam Tanzania * E-mail of the corresponding author: mahona.ben@gmail.com Abstract The paper aims at studying the determinants of trade in the East African Community (EAC). The paper explains as to why despite having five members, the two countries Kenya and Tanzania dominates trade among EAC members.Using the aggregated gravity model, the study finds that, Tanzania and Kenya Trade are much determined by the economic size (GDP) of the EAC members rather than the Per capita GDPs of these countries. The coefficient of a distance variable has negative impact meaning the costs of trading, time related costs and costs related to market access are higher. In a disintegrated model, the economic size of the respective countries, Kenya and Tanzania,exerts a positive impact but Tanzania’s GDP have a higher value of coefficient than Kenya. The Tanzania’s importers GDPs coefficient is positive but not significant for Tanzania, while it is positive and significant for Kenya’s export Trade. Importers population showed a remarkable contribution to bilateral trade between Tanzania, Kenya and the rest of EAC. However, per capita income coefficient explains that Kenya and Tanzania does not trade high income oriented products for the coefficient had a negative sign which is significant. The distance, representing the cost of trading, is affects Tanzania export negatively more than how it does for Kenya. The exchange rate coefficient shows that price competition is important because for Tanzania lowering her currency does not half the export as if Kenya would do. Openness variable shows trade liberalization, perhaps the formation of EAC bloc;measures have significantly improved trade flows between EAC countries. Keywords: Gravity model, export oriented economy; Regional or Free Trade Agreements; production’s specialization and competitiveness 1. Introduction Trade between EAC member states is arguably as old as the history of these states. However, trade between Kenya and Tanzania which is the focus of this paper is of particular interest for one major reason; together the volume of trade between the two states constitutes over 45%of the entire EAC trade. Furthermore, there is currently more pronounced cross border investments between Kenya and Tanzania than in any other EAC member states. There are indications that once formalized; labor movements across the two countries are likely to be more predominant than in other member states. The East African Community (EAC) is an intergovernmental organization made of five member states namely Tanzania, Kenya, Uganda, Rwanda and Burundi. Historically there has been two phases in the creation of EAC. The first phase (referred herein as EAC I) stretches from 1967 when the Treaty which established EAC I was signed up to 1977 when the scheme collapsed amid political and economic frictions. During this phase EAC I had only three member states namely Tanzania, Kenya and Uganda. The second phase (i.e. EAC II) was embark upon by member states after realizing the loss of economies of scale and other benefits of the defunct EAC I and hence in 1999, a Treaty for establishing the second phase of EAC was signed by the respective Heads of State of the member countries. One of the significant developments of EAC II has been the inclusion of two new members; Rwanda and Burundi thus making the current membership of EAC to five. In terms of size, EAC has a total area of 1,817,945 km2 and an estimated population of 131.9 million people. The total Gross Domestic Product (GDP) of the region was estimated (2007) to be 61US $ bn. which culminates into an average per capita income of over US $ 450. Traditionally the rationale for the creation of regional integration schemes like EAC was in terms of trade promotion in member states. While trade promotion has remained the cornerstone for the regional economic groupings there is an upsurge of literature which had advocated for a broader developmental focus of the schemes. The history of economic and social cooperation in East Africa is as old as the history of the region. There is sufficient evidence to support the claim that the peoples of the region have enjoyed close socio-economic ties among themselves. Long before the creation of EAC (I) the colonial powers (mainly Britain which had a mandate over Kenya, Uganda and Tanzania after the end of the Second World War) had devised various approaches aimed at exploiting the economic potentials of the region. In 1917 for example, the British government established a customs union between Kenya and Uganda aimed at promoting trade between them. Tanzania (then Tanganyika) joined the union in later in 1923. A further attempt aimed at forging closer economic ties in the (East African) region was made in 1961 when the East African Common Services