Trade Openness and Performance of Manufacturing Sector in Nigeria

Abstract

Trade amongst countries has been regarded as a potential channel through which the manufacturing sector contributes to the growth of a typical developing economy like Nigeria. However, the contribution of the Nigerian manufacturing sector to the country’s economic growth has fluctuated abysmally over the decades of trade liberalization. This paper thus assesses the impact of trade openness on the value added output growth of the manufacturing sector in Nigeria, using the Structural Vector Autoregressive (SVAR) model to estimate the linkages on secondary data spanning a period of 1985-2023. The variables used in this study include, exchange rate, tariffs, capital, labour and trade openness; while Manufacturing Value Added (MVA) is used to proxy the performance of manufacturing sector. After accounting for structural breaks in the series and ascertaining the stationarity properties of the series, the results indicated that though the lagged trade openness has a positive impact on manufacturing productivity, this is compromised by the negative and significant effect in the current period. This negative nexus is further reinforced by the negative impacts of exchange rate and capital stock on manufacturing productivity. The result of impulse response function revealed that manufacturing productivity responded to its own shocks, tariff, exchange rate and capital are positive; thus, establishing an expansionary effect of exchange rate and tariff devaluation on manufacturing productivity in Nigeria. The study therefore concluded that though trade openness is a strong driver of trade and industrial policies in Nigeria, the net effect thereof is negative and so, it potentially dampens manufacturing output, especially in the long-run. Based on these findings, the study recommended that, the government should adopt proactive trade policies to protect and give competitive advantage to the domestic manufacturers in the domestic, regional and global markets.