The Determinants of EU Processing Trade

This paper assesses the determinants of European outward and inward processing trade. Thereby, it distinguishes between size, relative factor endowment, (other) cost factors and infrastructure variables. Using a large panel of bilateral processing trade flows of the EU12 countries at the aggregate level over the period 1988–1999, we find that infrastructure variables, relative factor endowments and other cost variables are important determinants for the EU's outward processing trade. Costs also play a key role for the EU's inward processing trade.