Abstract
This paper focuses on the trade potential of manufactured exports from countries belonging to the enlarged EU (EU25) to groups of countries of that economic area in 2002. We note that previous results on trade potential, based on the estimation of a gravity model, may be invalid. Thus, we propose a correct approach based on the Poisson Pseudo-Maximum Likelihood estimator and the calculation of confidence intervals with the Delta method. The gravity model includes fixed effects to capture bilateral trade specificities between country groupings. We conclude that CEEC as a group had apparently exhausted the possibilities for export expansion in the EU25, unless dynamic changes were to take place. However, several of the remaining EU25 countries had not yet reached their export potential to the EU25 markets, including to the CEEC as a group.
Similar content being viewed by others
Notes
Note that other authors have assessed the trade potential of the CEEC and the EU members by including the CEEC in the sample of countries under consideration (in-sample approach) as the period of their analysis approached the full adoption by the CEEC of the EU trade rules (see, for instance, Baldwin 1994; Nilsson 2000; or Caetano and Galego 2005), while other authors have opted for excluding the CEEC from the regression analysis (such as, for instance, Wang and Winters 1992; Hamilton and Winters 1992; or Brülhart and Kelly 1999).
For cross-section gravity modelling see, for instance, Brülhart and Kelly (1999) or Nilsson (2000). For panel data modelling, see, for instance, Baldwin (1994), Gros and Gonciarz (1996), Mátyás (1997), Egger (2000), Egger (2002), Egger and Pfaffermayr (2003), De Benedictis and Vicarelli (2005) and Cheng and Wall (2005).
An exception is Helmers and Pasteels (2005).
This was also the option of Helmers and Pasteels (2005) in trade potential calculations.
Related to the fact that, in trade between countries i and j, if country i has high barriers with other partner countries, this will reduce the relative price of country j goods and hence, increase imports of i from j.
Rose (2000) estimated that the volume of trade between countries with a common currency is more than three times greater than between countries with different currencies. However, some criticism has been directed at this finding, which has been considered to be overestimated (see, for instance, Yeyati 2003).
See for instance, Kandogan (2004) for a presentation of the “augmented” version.
For instance, if v ij is log-normal with variance \(\sigma^{2}_{ij}=\sigma^{2} \ {\rm exp}(z_{ij})\) then:
\(E\left( {\log \left. {v_{ij} } \right|z_{ij} } \right)=-\left( {1 \mathord{\left/ {\vphantom {1 2}} \right. \kern-\nulldelimiterspace} 2} \right)\log \left\{{1+\sigma ^2\,\exp \left( {z_{ij} } \right)} \right\}\)
Among others, Dhar and Panagariya (1999) argued that total trade should not be the dependent variable, since it imposes equality of coefficients on imports and exports, a criticism that is widely accepted.
We have also estimated the equation for the export flows but, as expected, the results do not fully coincide. This may be due to the possible inaccuracies in export data and also to the fact that exports and imports are computed differently and the differences between cif (for imports) and fob (for exports) may vary according to each specific flow.
Many authors use GDP per capita together with GDP. We have opted to estimate the effects of GDP and population separately in order to simplify their interpretation. Indeed, the alternative option implies that not only is the coefficient of population restricted to be a function of the coefficient of the GDP, but also the effect of the latter is not directly read by only one coefficient.
This is a common variable in studies that include the CEEC. See, for instance, Beers and Biessen (1996).
Some authors, such as Christie (2002), substitute the capital by a major city that seems to be closer to the country’s economic centre of gravity. In this respect, we opted to consider Amsterdam, rather than Den Haag, as the Dutch capital.
Also known as “as the crow flies”, which is technically defined as the great-circle distance between the two latitude-longitude combinations.
Christie (2002), attempted to take account of border waiting times by making use of a transport time matrix between the main transport nodes of the CEEC, but concluded that this specific variable does not clearly outperform the traditional distance measure.
See Martínez-Zarzoso and Nowak-Lehmann (2003) for an inclusion of infrastructure facilities endowments (namely, in terms of road, rail, maritime and air infrastructures) in a gravity model.
Polak (1996) used a location index equal to the sum of all bilateral distances weighted by partners’ GDPs.
See, for instance, Kösekahyaoǧlu (1994).
The Delta method is used to obtain the variance of non-linear functions of parameters estimators. See Greene (2007) for details.
References
Anderson J, van Wincoop E (2003) Gravity with gravitas: a solution to the border puzzle. Am Econ Rev 93(1):170–192
Arnon A, Spivak A, Weinblatt J (1996) The potential for trade between Israel, the Palestinians and Jordan. World Econ 19(1):113–134
Baldwin R (1994) Towards an integrated Europe. Centre for Economic Policy Research, London
Bayoumi T, Eichengreen B (1997) Is regionalism simply a diversion? Evidence from the evolution of the EC and EFTA. In: Ito T, Krueger AO (eds) Regionalism versus multilateral trade arrangements. The University of Chicago Press, Chicago
Beers C, Biessen G (1996) Trade possibilities and structure of foreign trade: the case of Hungary and Poland. Comp Econ Stud 38:1–20
Beers C, Linnemann H (1992) Commodity composition of trade in manufactures and south-south trade potential. In: Linnemann H (ed) South-south trade preferences: the GSTP and trade in manufactures. Sage, Amsterdam, Indo-Dutch Studies on Development Alternatives No. 9
Boisso D, Ferrantino M (1997) Economic distance, cultural distance and openness: empirical puzzles. J Econ Integ 12:456–484
Breuss F, Egger P (1999) How reliable are estimations of east-west trade potentials based on cross-section gravity analyses? Empirica 26:81–94
Brülhart M, Kelly MJ (1999) Ireland’s trading potential with central and eastern european countries: a gravity study. Econ Soc Rev 20(2):159–74
Bussière M, Firdmuc J, Schnatz B (2005) Trade integration of Central and Eastern European Countries, lessons from a gravity model. European Central Bank Working Paper Series no 545. pappers.ssrn.com/sol3/papers.cfm
Caetano J, Galego A (2005) Trade flows among CEEC and EU countries: what future perspectives. Department of Economics University of Évora. econwpa.wustl.edu/eps/it/papers/0504/0504002.pdf
Cheng I-H, Wall H (2005) Controlling for heterogeneity in gravity models of trade and integration. The Federal Reserve Bank of St. Louis Review 87(1):49–63
Christie E (2002) Potential trade in South-East Europe: a gravity model approach. South-East Eur Rev 85(4):81–101
De Benedictis L, Vicarelli C (2005) Trade potentials in gravity panel data models. Topics in Economic Analysis & Policy 5(1), Article 20
Dhar S, Panagariya A (1999) Is East Asia less open than North America and the EEC? No. In: Piggott J, Woodland A (eds) International trade policy and the pacific rim. Macmillan, London
Egger P (2000) A note on the proper econometric specification of the gravity equation. Economics Letters 66(1):25–31
Egger P (2002) An econometric view on the estimation of gravity models and the calculation of trade potentials. World Econ 25(2):297–312
Egger P, Pfaffermayr M (2003) The proper panel econometric specification of the gravity equation: a three-way model with bilateral interaction effects. Empir Econ 28:571–580
Finger J, Kreinin M (1979) A measure of export-similarity and its possible uses. Econ J 89:905–912
Frankel J (1997) Regional trading blocs in the world economic system. Institute for International Economics, Washington D.C.
Greene WH (2007) Econometric analysis, 6th edn. Prentice Hall, Upper Saddle River
Gros D, Gonciarz A (1996) A note on the trade potential of Central and Eastern Europe. Eur J Polit Econ 12:709–721
Hamilton C, Winters L (1992) Opening up international trade with Eastern Europe. Econ Pol 14:77–116
Helmers C, Pasteels J-M (2005) TradeSim (third version), a gravity model for the calculation of trade potentials for developing countries and economies in transition. International Trade Centre Working Paper, UNCTADF/WTO, June
Javorcik B (2001) Does relative location matter for bilateral trade flows? An extension of the gravity model. J Econ Integ 16(3):379–398
Kandogan Y (2004) The role of blocs on trade: a comparison across gravity models. Working Papers 2004–1, University of Michigan-Flint, School of Management. http://som.umflint.edu/yener/2004-01.pdf
Kösekahyaoǧlu L (1994) An analysis of the similarity between Exports of Turkey and the European Union-12. Working Paper of the Department of Economics Isparta Süleyman Demirel Üniversitesi. www.geocities.com/ceteris_tr2/l_kosekahyaoglu2.doc
Lamotte O (2002) Trade potential between Yugoslavia and the European Union. In: 7th EACES conference globalisation and economic governance. http://eaces.gelso.unitn.it/Eaces/Work/Papers/EACES%20Potential.pdf
Linder S (1961) An essay on trade and transformation. Wiley, New York
Linnemann H (1966) An econometric study of international trade flows. North Holland, Amsterdam
Linnemann H, Beers C (1988) Measures of export-import similarity and the linder hypothesis once again. Weltwirtschaftliches Archiv 124(3):445–457
Martínez-Zarzoso I, Nowak-Lehmann F (2003) Augmented gravity model: an empirical application to Mercosur-European union trade flows. J Appl Econ 6(2):291–316
Mátyás L (1997) Proper econometric specification of the gravity model. World Econ 20(1):363–68
Nilsson L (2000) Trade integration and the EU economic membership criteria. Eur J Polit Econ 16:807–827
Paas T (2002) Gravity approach for exploring baltic sea regional integration in the field of international trade. Hamburg Institute of International Economics, Hamburg, HWWA Discussion Paper No. 180
Polak J (1996) Is APEC a natural regional trading bloc? a critique of the gravity model of international trade. World Econ 19(5):533–544
Rose A (2000) One money, one market, estimating the effect of a common currency on trade. Econ Pol 30:7–45
Santos Silva J, Tenreyro S (2006) The log of gravity. Rev Econ Stat 88(4):641–658
Wang Z, Winters L (1992) The trading potential of Eastern Europe. J Econ Integ 7(2):113–136
Yeyati E (2003) On the impact of a common currency on bilateral trade. Econ Lett 79(1):125–129
Author information
Authors and Affiliations
Corresponding author
Additional information
The authors are indebted to J.M.C. Santos Silva and to an anonymous referee for their helpful comments. Useful comments received at the fourth annual European Economic and Financial Society conference and the seventh annual European Trade Study Group conference are equally acknowledged. We express our grateful appreciation for the financial support received from the Fundação para a Ciência e a Tecnologia, under the FCT/POCTI, partially funded by FEDER and the Fundo de Apoio à Comunidade Científica.
Appendix
Appendix
1.1 A.1 Countries included in the data set
Austria, Belgium, Bulgaria, The Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.
1.2 A.2 Variables
1.2.1 A.2.1 Dependent variable
M—Nominal Import (cif) flows of manufactured products (covering Comext’s 2-digit Combined Nomenclature, codes 16 to 98), measured in thousands of euro, 2002. Source: European Commission’s Comext Database.
1.2.2 A.2.2 Independent variables
-
DIST—Absolute Distance: the geodesic distance between capitals (in the case of The Netherlands, Amsterdam substitutes Den Haag), measured as the surface distance between two points of latitude and longitude (great circle distance), expressed in kilometers. Source: www.wcrl.ars.usda.gov/cec/java/lat-long.htm .
-
MGDP/XGDP—Importer/Exporter country’s Nominal Gross Domestic Product at Market Prices, expressed in thousands of euro, 2002. Source: Eurostat’s New Cronos Database, Nov. 24th, 2003.
-
MPOP/XPOP—Importer/Exporter country’s Population, expressed in thousands of people at the end of 2002. Source: Eurostat’s New Cronos Database, November 24th, 2003.
-
NEIGH—Neighbouring Dummy Variable: equal to one if two trading partners share a land or sea border, zero otherwise. Source: CIA’s World Factbook 2003 on www.cia.gov/cia/publications/factbook/index.html .
-
IDIOM—Common Language Dummy Variable: equal to one if two trading partners share a same official language, zero otherwise. Source: CIA’s World Factbook 2003 on www.cia.gov/cia/publications/factbook/index.html .
-
ETHN—Ethnic Dummy Variable: equal to one if there is in one of the countries an ethnic minority of the other country that represents more than 5% of total population of the latter, zero otherwise. Source: CIA’s The World Factbook 2003.
-
CCT—Commodity composition of trade (COS Variable): complementarity measure of trading structures. See formula in the text. Covering 6-digit CN yearly data of manufactured products for 2002. Source: European Commission’s Comext Database.
-
EURO—Euro Dummy Variable: equal to one if both countries involved in the trade flow share the euro as a common currency, zero otherwise.
-
RECI(−1)—Reciprocity: the opposite trade flow of the dependant variable (2-digit of the Combined Nomenclature), measured in thousands of euro. Source: European Commission’s Comext Database, 2001 and 2002.
-
GERMAN—German Dummy Variable: equal to one if one of the countries involved in the trade flow is Germany, zero otherwise.
-
MLOCK/XLOCK—Landlockedness Dummy Variable for the Importer/ Exporter country: is equal to one if the importing country has no direct connection to sea, zero otherwise.
-
Specific group-pair dummies: CEEC-CEEC; CEEC-CC; CEEC-EU11; CC-CEEC; CC-CC; CC-EU11; EU11-CEEC; EU11-CC and EU11–EU11. Equal to one if the exporting country belongs to the first group and the importing country to the second group, zero otherwise.
About this article
Cite this article
Proença, I., Fontoura, M.P. & Martínez-Galán, E. Trade in the enlarged European Union: a new approach on trade potential. Port Econ J 7, 205–224 (2008). https://doi.org/10.1007/s10258-008-0033-5
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10258-008-0033-5
Keywords
- European Union
- Gravity model
- Poisson Pseudo-Maximum Likelihood estimator
- Trade potential
- Confidence intervals
- Delta method