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On the bilateral trade effects of free trade agreements between the EU-15 and the CEEC-4 countries

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An Erratum to this article was published on 29 July 2009

Abstract

The expansion of regionalism has spawned an extensive theoretical literature analysing the effects of free trade agreements (FTAs) on trade flows. In this paper we focus on FTAs (also called European agreements) between the European Union (EU-15) and the Central and Eastern European countries (CEEC-4, i.e. Bulgaria, Hungary, Poland and Romania) and model their effects on trade flows by treating the agreement variable as endogenous. Our theoretical framework is the gravity model, and the econometric method used to isolate and eliminate the potential endogeneity bias of the agreement variable is the fixed effect vector decomposition (FEVD) technique. Our estimation results indicate a positive and significant impact of FTAs on trade flows. This finding is robust to the inclusion in the sample of a group of control countries (specifically Belarus, the Russian Federation and the Ukraine) that did not sign an FTA. Besides, we show that trade growth after the FTA agreement with the EU was signed exceeded trade growth of the control group of countries, which did not become members.

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Notes

  1. Hungary (1991), Poland (1991), Romania (1993), the Czech Republic (1993), Slovakia (1993), Bulgaria (1993), Latvia (1995), Estonia (1995), Lithuania (1995) and Slovenia (1995).

  2. See Baier and Bergstrand (2004).

  3. These models emphasise the role of transport costs in maximising/minimising the welfare of countries (proximity of/distance between partners implies low/high transport costs).

  4. See Johnson (1965), Cooper and Massell (1965), Wonnacott and Lutz (1989), Magee (2003) and Baier and Bergstrand (2004).

  5. The popularity of the gravity model is highlighted by Eichengreen and Irwin (1995) who consider it “the workhorse for empirical studies of regional integration”.

  6. Baldwin (1994), Frankel (1997), Soloaga and Winters (2001), Glick and Rose (2002), Rault, Sova, and Sova (2007a, 2007b) and Carrère (2006).

  7. Egger (2000, 2002).

  8. The programme STATA proposed by the authors executes all three steps and adjusts the variance-covariance matrix. Options like AR (1) error-correction and robust variance-covariance matrix are allowed.

  9. Rose (2004) also compares trade patterns for countries in the GATT/WTO with those outside the system using two dummy variables, one to measure the trade effect if both countries are GATT/WTO and the other if one country is a member and the other is not.

  10. EU-15: Austria, Belgium-Luxemburg, Denmark, the United Kingdom, Finland, France, Germany, Greece, the Netherlands, Ireland, Italy, Portugal, Spain, Sweden.

  11. Bulgaria, Hungary, Poland, Romania.

  12. See for instance, Soloaga and Winters (2001), Carrère (2006), Rault et al. (2007a, b).

  13. ≈ exp (0.204)−1.

  14.  ≈ (exp (0.21)−1)− (exp(0.09)−1).

  15. A variance inflation factor value higher than 10 reveals the presence of multicollinearity requiring specific corrections (Gujarati 1995).

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Acknowledgments

We are very grateful to a referee and a member of the Advisory Board for helpful remarks and suggestions on an earlier draft of this paper.

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Authors and Affiliations

  1. Centre for Empirical Finance, Brunel University, West London, UB8 3PH, UK

    Guglielmo Maria Caporale

  2. CESifo, Munich, Germany

    Guglielmo Maria Caporale

  3. DIW, Berlin, Germany

    Guglielmo Maria Caporale

  4. LEO, University of Orléans, UMR 6221, BEM (Bordeaux Management School), Orléans, France

    Christophe Rault

  5. EDHEC (Ecole des Hautes Etudes Commerciales), Lille Cedex, France

    Christophe Rault

  6. CES, Sorbonne University, A.S.E and E.B.R.C, Paris, France

    Robert Sova

  7. CES, Sorbonne University, E.B.R.C, Paris, France

    Anamaria Sova

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  1. Guglielmo Maria Caporale
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  2. Christophe Rault
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Correspondence to Guglielmo Maria Caporale.

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An erratum to this article can be found at http://dx.doi.org/10.1007/s10290-009-0020-7

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Caporale, G.M., Rault, C., Sova, R. et al. On the bilateral trade effects of free trade agreements between the EU-15 and the CEEC-4 countries. Rev World Econ 145, 189–206 (2009). https://doi.org/10.1007/s10290-009-0011-8

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