Skip to main content

New Evidence on Trade and FDI: how Large is the Euro Effect?

Abstract

In this paper we analyse the effect that the euro has had on trade using a gravity model for 28 countries and covering the period 1990–2013. Our gravity specification includes time-varying fixed effects, correcting any possible bias that may arise from multilateral resistance variables or unobserved time-varying heterogeneity. Additionally, we explore the potential complementarity or substitution relationship between FDI and trade by including FDI inward and outward stocks in the specification. The time period in the dataset covers the creation and evolution of the European Monetary Union (EMU), starting from the introduction of notes and coins and including the recent economic crisis. Overall, our results show a positive effect of the EMU on trade and reveal the existence of a complementary relationship between trade and FDI.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5

Notes

  1. See, for instance, Feenstra et al. (2001).

  2. See Anderson and van Wincoop (2003).

  3. The number of observation is (N x N-1 x T) / 2 = (28 × 27 × 23)/2 = 8694. Unfortunately, data on OECD are not complete for the period under analysis, so the number of observations is reduced to 7126, as Table 3 shows.

References

  • Aizenman J, Ilan N (2006) FDI and trade – two way linkages? The Quarterly Review of Economics and Finance 46:317–337

    Article  Google Scholar 

  • Albuquerque R, Loayza N, Serven L (2005) World market integration through the lens of foreign direct investors. J Int Econ 66:267–295

    Article  Google Scholar 

  • Anderson JE, Yotov Y (2012) Gold standard gravity. NBER working papers 7835

  • Anderson J (1979) A theoretical foundation for the gravity equation. Am Econ Rev 69:106–116

    Google Scholar 

  • Anderson JE, van Wincoop E (2003) Gravity with gravitas: a solution to the border puzzle. Am Econ Rev 93:170–192

    Article  Google Scholar 

  • Baier S, Bergstrand J (2001) The growth of world trade: tariffs, transport costs, and income similarity. J Int Econ 53:1–27

    Article  Google Scholar 

  • Baier S, Kerr A, Yotov Y (2017) Gravity, distance, and international trade. Survey to be published in a book by Edgar Elgar publishing, draft

  • Baldwin R, Taglioni D, (2006) Gravity for dummies and dummies for gravity equations. NBER working paper no. 12516

  • Baldwin R, Di Nino V, Lionel Fontagné RADS, Taglioni D (2008) Study on the impact of the euro on trade and foreign direct investment. Econ Pap 321

  • Bénassy-Quéré A, Coupet M, Mayer T (2007) Institutional determinants of foreign direct investment. World Econ 30:764–782

    Article  Google Scholar 

  • Bergin PR, Lin CY (2012) The dynamic effects of a currency union on trade. J Int Econ 87:191–204. https://doi.org/10.1016/j.jinteco.2012.01.005

    Article  Google Scholar 

  • Bergstrand J (1985) The gravity equation in international trade: some microeconomic foundations and empirical evidence. Rev Econ Stat 67:474–481

    Article  Google Scholar 

  • Brouwer J, Paap R, Viaene JM (2008) The trade and FDI effects of EMU enlargement. J Int Money Financ 27:188–208

    Article  Google Scholar 

  • Bun MJ, Klaassen FJ (2002) Has the euro increased trade? Tinbergen institute discussion paper no. 02-108/2, University of Amsterdam

  • Camarero M, Tamarit C (2004) Estimating exports and imports demand for manufactured goods: the role of FDI. Weltwirtsch Archiv 140:347–375

    Article  Google Scholar 

  • Camarero M, Gómez E, Tamarit C (2013) EMU and trade revisited: long-run evidence using gravity equations. World Econ 36:1146–1164

    Article  Google Scholar 

  • Camarero M, Gómez E, Tamarit C (2014) Is the ‘euro effect´ on trade so small after all? New evidence using gravity equations with panel cointegration techniques. Econ Lett 124:140–142

    Article  Google Scholar 

  • Campbell DL (2013) Estimating the impact of currency unions on trade: solving the Glick and rose puzzle. World Econ 36:1278–1293. https://doi.org/10.1111/twec.12062

    Article  Google Scholar 

  • De Sousa J, Lochard J (2011) Does the single currency affect foreign direct investment?, scan. J Econ 113:553–578

    Google Scholar 

  • De Sousa J (2012) The currency union effect on trade is decreasing over time. Econ Lett 117:917–920

    Article  Google Scholar 

  • Devereux MP, Griffith R, Klemm A (2002) Corporate income tax reforms and international tax competition. Econ Policy 17(35):449–495

    Article  Google Scholar 

  • Eicher TS, Henn C (2011) One money, one market. A revised benchmark. Rev Int Econ 19:419–435

    Article  Google Scholar 

  • Faruqee H (2004) Measuring the trade effects of EMU. IMF Working Paper No 04/154

  • Flam H, Nordstrom H (2006) Trade volume effects of the euro: aggregate and sector estimates. Institute for International Economic Studies Seminar Papers no. 746, Stockholm University

  • Fontagné L (1999) Foreign direct investment and international trade: complements or substitutes?. OECD science, technology and industry working papers 1999/3

  • Fontagné L, Mayer T, Ottaviano GIP (2009) Of markets, products and prices: the effects of the euro on European firms. Intereconomics 44:149–158. https://doi.org/10.1007/s10272-009-0289-8

    Article  Google Scholar 

  • Frankel J, Rose AK (1998) The endogeneity of the optimum currency area criteria. Econ J 108:1009–1025

    Article  Google Scholar 

  • Feenstra R (ed) (2004) Advanced international trade: theory and evidence. Princeton University Press, Princeton

    Google Scholar 

  • Feenstra R, Markusen J, Rose A (2001) Using the gravity equation to differentiate among alternative theories of trade. Can J Econ 34:430–447

    Article  Google Scholar 

  • Glick R, Rose AK (2002) Does a currency union affect trade? The time-series evidence. Eur Econ Rev 46:1125–1151

    Article  Google Scholar 

  • Glick R, Rose AK (2016) Currency unions and trade: a post-EMU reassessment. Eur Econ Rev 87:78–91

    Article  Google Scholar 

  • Helpman E, Melitz M, Rubinstein Y (2008) Estimating trade flows: trading partners and trading volumes. Q J Econ 123:441–487

    Article  Google Scholar 

  • Katayama H, Melatos M (2011) The nonlinear impact of currency unions on bilateral trade. Econ Lett 112:94–96

    Article  Google Scholar 

  • Kelejian H, Tavlas GS, Petroulas P (2012) In the neighborhood: the trade effects of the euro in a spatial framework. Reg Sci Urban Econ 42:314–322

    Article  Google Scholar 

  • Koike R (2004) Japan's foreign direct investment and structural changes in Japanese and east Asian trade, monetary and economic. Studies 22:145–182

    Google Scholar 

  • Kreinin M, Plummer M (2008) Effects of regional integration on FDI: an empirical approach. Journal of Asian Economics 19:447–454

    Article  Google Scholar 

  • Micco A, Stein E, Ordonez G (2003) The currency union effect on trade: early evidence from the European Union. Econ Pol 18:315–356

    Article  Google Scholar 

  • Mitze T, Bjorn A, Gerhard U (2010) Trade-FDI linkages in a simultaneous equations system of gravity models for German regional data. Economie Internationale 122:121–162

    Google Scholar 

  • Petroulas P (2007) The effect of the euro on foreign direct investment. Eur Econ Rev 51:1468–1491

    Article  Google Scholar 

  • Rose AK (2000) One money. One Market: The Effect of Common Currencies on Trade, Econ Pol 15:9–45

    Google Scholar 

  • Rose AK, Stanley TD (2005) A meta-analysis of the effect of common currencies on international trade. J Econ Surv 19:347–365

    Article  Google Scholar 

  • Rose A (2017) Why do estimates of the EMU effect on trade vary so much? Open Econ Rev 28:1–18

    Article  Google Scholar 

  • Santos-Silva JM, Tenreyro S (2006) The log of gravity. Rev Econ Stat 88:641–658

    Article  Google Scholar 

  • Schiavo S (2007) Common currencies and FDI flows. Oxf Econ Pap 59:536–560

    Article  Google Scholar 

  • Serlenga L, Shin Y (2007) Gravity models of intra-eu trade: application of the ccep-ht estimation in heterogeneous panels with unobserved common time-specific factors. J Appl Econ 22:361–381

    Article  Google Scholar 

  • Yotov YV, Piermartini R, Monteiro J-A, Larch M (2016) An advanced guide to trade policy analysis: the structural gravity model. UNCTAD and WTO, Geneva, p 67

    Google Scholar 

  • Westerlund J, Wilhelmsson F (2009) Estimating the gravity model without gravity using panel data. Appl Econ 43:1–9

    Google Scholar 

Download references

Acknowledgments

The authors acknowledge ISCEF Organizing Committee for the opportunity of presenting this article at the 4th International Symposium in Computational Economics and Finance. We also thank the Editor in Chief, the Guest Editor and the anonymous referees for their contribution to the improvement of this paper. Finally, the authors also acknowledge the financing from Spanish MINEIC and FEDER [project ECO2017-83255-C3-3-P].

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Estrella Gómez-Herrera.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Camarero, M., Gómez-Herrera, E. & Tamarit, C. New Evidence on Trade and FDI: how Large is the Euro Effect?. Open Econ Rev 29, 451–467 (2018). https://doi.org/10.1007/s11079-018-9479-y

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11079-018-9479-y

Keywords

  • FDI
  • Trade
  • Euro effect

JEL Classification

  • F10
  • F15