An assessment of the Europe agreements’ effects on bilateral trade, GDP, and welfare

The so-called Europe Agreements had been enacted in the 1990s to initiate the integration of goods markets between the 15 EU incumbent economies as of 1995 and 10 potential entrants located in Central and Eastern Europe. This paper evaluates the trade, GDP, and welfare effects of these agreements by means of structural analysis of a bilateral trade flow model. The results support three conclusions. First, the agreements exerted significant positive effects on goods trade between the EU15 incumbents and the CEEC and, at the same time, they induced trade redirection from other countries. Second, EU15 GDP responded by an increase of much less than 1% while that in the 10 CEEC increased by several percent in response to the agreements. Third, the effects on welfare were moderate in the EU15 but amounted to more double-digit percentage changes in the involved CEEC.     

Home country bias in international emissions trading: Evidence from the EU ETS

We examine the pattern of allowance trades in the European Union Emissions Trading System (EU ETS) using highly disaggregated trading data and identify a significant and robust home market bias. Our results point to informational transactions costs that increase when trading across national borders. The existing trade pattern in goods and services explains two thirds of the home bias, with the remainder due to other causes. Our finding suggests that firms make use of existing trade networks to overcome search costs in bilateral allowance trade. Since the home bias differs across firms, it follows that marginal abatement costs are not equalized across market participants of the EU ETS.     

Russia's accession to the WTO: the potential for trade increase

This paper investigates the impact of institutions on trade and estimates the potential for trade increase between the Commonwealth of Independent States (CIS) and the European Union (EU). The latter is computed from a gravity equation using the procedure introduced by Hausman and Taylor [1981. Panel Data and Unobservable Individual Effects. Econometrica 49 (6) 1377–1398]. We find that CIS trade is still characterized by a large trade diversion effect, which implies that trade with non-CIS countries could increase considerably in the long run. Another source of deepening the level of the European trade integration comes from the convergence of institutions towards the EU standards in light of Russia's application to join the WTO. Journal of Comparative Economics 32 (4) (2004) 680–699.     

Goods market responses to trade shocks and trade and wages decompositions

Abstract.  Trade and wages literature asks whether trade or technology has been the major factor behind increases in wage inequality in OECD countries since the 1980s. In this literature, little attention has been paid to how goods market responses to trade shocks affect conclusions. Using an Armington heterogeneous goods trade model we capture demand side effects, and show how trade shocks affecting the price of unskilled‐intensive importable goods can be absorbed on the demand side of goods markets, with little or no impact on relative wage rates. No wage impact occurs if the elasticity of substitution in preferences between imports and import substitutes is one. As this elasticity increases, trade plays an ever larger role in explaining wage inequality changes, and as the elasticity goes below one the sign of the effect changes. We present some results of general equilibrium decompositions of total wage change into trade and technology components using UK data. We suggest that since many import demand elasticity estimates are in the neighbourhood of one, there is a prima facie case that goods market considerations further lower the significance of trade as an explanation of recent trends in OECD wage inequality beyond that claimed in the literature.     

The Impact of Foreign Direct Investment on Poland's Trade with the European Union

Over 75% of FDI in Poland originates from the EU. The EU also predominates in the exports and imports of FDI companies. The objective of this article is to examine whether FDI is likely to replace trade or to create new trade flows. In particular, the article shows the influence of FDI on Poland's trade with the EU. The FDI impact on Polish trade can be seen as its contribution to export creation. Moreover, externalities caused by trade and FDI inflow are influencing Polish specialisation patterns, which is important in the process of integrating the economy into the world market.     

Market entry and trade weighted import costs

Trade weighting is a common method of aggregating trade frictions. It will understate changes in these costs when there are non‐ad valorem trade costs and quality differences. Newly traded goods enter at higher trade costs than previously traded ones. Lower import costs shift trade to low‐quality goods with higher measured trade costs. These effects are quantitatively important. U.S. import costs fall more than twice as fast as trade weighted measures from 1974 to 2004 after the impact of shifting quality and newly traded goods is accounted for. Empirical estimates that use trade weighting will underestimate the welfare impact of trade costs.     

Shipping the good fish out? An empirical study on the EU seafood imports under the EU’s Generalized System of Preferences

The impact of the EU (European Union) Generalized System of Preference (GSP) on the relative EU’s demand for seafood quality was evaluated in the study. We first explored the theoretical Alchian–Allen result of change in ad valorem tariffs in an n–good world, and then tested this result in the empirical study. The theoretical analysis suggests that whether a reduced ad valorem tariff in an n–good case raises the relative demand for high-value goods depends not only on the substitutability between high-value and low-value goods but also on the substitutability between these similar goods with their weak substitutes. In the empirical sections, we first estimated the elasticities of the substitutions and then used these elasticities to evaluate the quality composition of the EU’s seafood imports from the beneficiary countries. The empirical results in general confirm the occurrence of ‘shipping the good fish out’ due to the reduced tariff rates under the EU’s GSP arrangements.     

The Effects of Trade Liberalization in a Vertical Structure

Despite the importance of international trade on intermediate goods, the literature did not pay much attention to this aspect in determining the effects of trade liberalization in the presence of a labor union. We take up this issue here and show the effects of trade liberalization on the final goods and/or the intermediate goods, where the domestic firm pays unionized wage and imports intermediate goods. We show that trade liberalization on the intermediate goods (final goods) increases (decreases) the unionized wage, labor union's utility and domestic profit. Trade liberalization on both the final goods and intermediate goods may either increase or decrease the domestic unionized wage, labor union's utility and domestic profit depending on the input coefficients and the initial tariff levels. Our qualitative results are robust with respect to the intermediate goods market structure, the pricing strategy of the intermediate goods producers and the union's objective function.     

Estimating the trade and welfare effects of Brexit: A panel data structural gravity model

This paper proposes a new panel data structural gravity approach for estimating the trade and welfare effects of Brexit. Assuming different counterfactual post‐Brexit scenarios, our main findings suggest that the UK's exports of goods to the EU are likely to decline within a range between 7.2% and 45.7% six years after Brexit has taken place. For the UK, the negative trade effects are only partially offset by an increase in domestic trade and trade with third countries, inducing a decline in the UK's real income of between 0.3% and 5.7%. The estimated welfare effects for the EU are not different from zero, but some members like Ireland are expected to also experience welfare losses.     

Labor Mobility, Trade, and Social Capital

Labor market integration raises welfare in the absence of distortions. This paper examines labor and goods market integration in a general‐equilibrium model with social capital. The findings are: (i) labor market integration has an ambiguous impact on welfare, and raises it if the goods and labor skills are sufficiently different; (ii) compared to Pareto optimum, labor mobility (social capital) is excessively large (depleted); (iii) trade is superior to labor market integration if trading costs are no higher than private migration costs, otherwise the outcome is ambiguous; and (iv) the creation of new institutions in response to labor market integration has an ambiguous impact on welfare.     

The impact of trade openness on technical efficiency in the agricultural sector of the European Union

The aim of this study is to analyse the impact of trade openness on technical efficiency of the European Union’s (EU) agricultural sector. There are no systematic theories linking trade policy to technical efficiency; hence, the relation between trade liberalization and technical efficiency is fundamentally ambiguous. Stochastic frontier analysis is used to model the relationship between EU’s production resources and agricultural output, as well as the importance of trade openness on technical efficiency of a country. The data for 16 of the 28 EU members were available for the period 1980–2007 including land, capital, fertilizer, labour, agricultural GDP, foreign direct investments (FDI), exports and import data. Results indicate that trade openness has an immediate, negative impact on efficiency in the EU agricultural sector. Over time, however, trade openness does increase efficiency. The FDI outflows increase efficiency. This suggests that an initial reduction in capital supply forces EU nations to utilize other factor inputs more efficiently. However, there is the unexamined potential that over time the depletion of capital results in a decrease in efficiency. Finally, formerly communist member-countries of the EU are found to have the lowest technical efficiency scores whereas Southern European nations have the highest efficiency.     

Paying Our Way in the World? Visible and Invisible Dangers of Brexit

The UK economy has long been associated with a weak balance of payments, reflecting an underlying growth model reliant on private household consumption. A deficit in goods trade, chiefly with the EU, has been offset by surpluses in services trade and foreign investment earnings. The Single Market provided wider markets for the UK, but did not fundamentally alter Britain's structural weaknesses. The Brexit vote took place against the background of Britain running its largest peacetime current account deficit. Financing Britain's external position represents a key challenge post-Brexit. Post-Brexit models for Britain partially address this. Any emergent model will critically depend on the nature of the Brexit deal with the EU, not least in terms of the impact on financial services and on supply chains. This paper sets out the recent evolution of the UK's current account position, particularly in relation to the EU. It then highlights particular areas of potential disruption from Brexit and sketches out scenarios of possible evolution of the Britain's external position in response to this.     

Kosovo – EU trade relations: a dynamic panel poisson approach

To inform policymaking following trade liberalization between Kosovo and the EU within the framework of the Stabilisation and Association Agreement (SAA), we specify a gravity model to investigate Kosovo’s trade in goods with 28 EU countries over the period 2005–2013. We reconcile competing methodological requirements by using a dynamic Poisson approach to estimation. Together, persistent trade patterns and an unfavourable combination of demand and supply elasticities suggest that trade liberalization in isolation is not sufficient to promote exports but may need to be incorporated within a wider policy and institutional framework. In addition, our findings suggest that trade costs should be a particular focus for policy: distance has a big negative influence on Kosovo’s exports to EU countries; while diaspora communities promote Kosovo’s exports to EU markets, most likely because they offset trade costs.     

On the static and dynamic costs of trade restrictions for small developing countries

We analyze the costs of trade restrictions for a small developing economy (LDC). Intermediate goods invented elsewhere are only introduced on the LDC market if it is profitable to do so. The LDC economy evolves to a balanced growth path in which income, welfare, and the share of available goods increase if trade restrictions fall. The adjustment path is asymmetric: an increase in trade restrictions leads to a slow-down of economic growth, while a decrease may lead to a rapid catch-up process. The dynamic costs of trade restrictions are in general substantially larger than the static costs.     

Transparency in the Foreign Exchange Market and the Volume of International Trade

In this paper we study the impact of more transparency in the foreign exchange market on the ex ante expected volume of international trade. Transparency is measured by the informational content of publicly observable signals. These signals convey information about the use of policy instruments which affect the future exchange rate. We find that a higher level of transparency may increase or decrease the volume of international trade. In particular, the impact of greater transparency depends on the curvature of the firms’ marginal cost function. Furthermore, the firms’ex ante expected profits are higher when the foreign exchange market is more transparent.     

The Question of Access to the Japanese Market*

It is now widely accepted that Japan has relatively low official barriers to merchandise, particularly manufactured goods, trade relative to other industrial countries. Yet, Japan's current account and trade surpluses have encouraged the view that there must be special ‘hidden barriers’ to accessing the Japanese market, and a literature has developed on the premise that Japanese business organizations (keiretsu) limit foreign penetration of markets of manufactured goods. This paper surveys the main elements of this literature and questions some of the assumptions upon which recent American policy in this area seems to have been developed.     

Changing trade patterns in major OECD countries

Disaggregated trade data are used to examine changing trade patterns for five developed economic regions: the USA, the European Union, Australia, Canada and Japan. This study covers the 1980–1997 time period, during which international trade for most goods faced less border protection. Changing trade patterns are found for the USA, Japan, and the EU, while persistent trade patterns are observed for Australia and Canada. Classifying goods into four groups, trade patterns found in manufactured goods were the most dynamic, and trade in bulk agricultural goods the most persistent.     

Costs of a missing FTA: the case of Turkey and Algeria

Turkey has been deeply integrated with the EU, its largest trading partner, particularly following the Customs Union agreement in 1996. However, the free trade agreements (FTAs) signed by the EU with third party countries may create some unfair competitive pressures, market share and welfare losses for Turkey. This study investigates the impact of the FTA signed by Algeria and the EU in 2005 on Turkey’s trade flows. Covering 181 countries, a difference-in-differences analysis embedded in an extended gravity framework is employed to quantify the trade effects of the EU-Algeria FTA for the period of 1996–2013. Our findings suggest that bilateral trade between Turkey and Algeria is affected adversely due to the FTA. The counterfactual analysis shows that Turkish exports and imports to/from Algeria could have been 12 and 17% higher, respectively, had there been no FTA between the EU and Algeria.     

Environmental policy in the European Union: Fostering the development of pollution havens?

A pollution haven occurs when dirty industries from developed nations relocate to developing nations in order to avoid strict environmental standards or developed nations imports of dirty industries expand replacing domestic production. The purpose of this study is to determine whether the European Union (EU) has increased its imports of “dirty” goods from poorer, less democratic countries during a period of more stringent environmental standards. Previous empirical studies such as those by Levinson and Taylor [Levinson, A., and Taylor, M.S., in press. Unmasking the Pollution Haven Effect. International Economic Review.], Ederington, Levinson and Minier [Ederington, J., Levinson, A., and Minier, J., 2005. Footloose and Pollution-Free. Review of Economics and Statistics., 87: 92-99.], Kahn and Yoshino (2004), and Ederington and Minier [Ederington, J., and Minier. J., 2003. Is Environmental Policy a Secondary Trade Barrier? An Empirical Analysis. Canadian Journal of Economics., 36: 137-54.] find evidence that United States imports are responsive to changes in environmental stringency, but the effects of EU policy have not been examined as thoroughly. Our study follows Kahn [Kahn, M.E., 2003. The Geography of Us Pollution Intensive Trade: Evidence from 1958 to 1994. Regional Science and Urban Economics., 33: 383-400.] and examines the impact of industry energy intensity and toxicity, measured by an energy index and a Toxic Release Inventory (TRI) index, on imports into the EU, at the 2-digit industry level from 1970 to 1999. We use the signing of the Maastricht Treaty to signify a period of more uniform and stringent community wide environmental standards (1993-1999), and identify the level of per capita GDP within an EU trading partner. We find an increased amount of EU energy intensive trade with poorer countries during the period with more stringent EU environmental standards. This result is not robust, however, when poorer countries are defined by OECD membership and geographic region. We do not find an increased amount of EU toxic intensive trade with poorer countries although there is some evidence of increased EU imports of toxic goods from poorer OECD and non-EU European countries. For our full sample of trading partners in all regions, the evidence supports the PHH for EU energy intensive trade, but not for toxic intensive trade. Results for regional trade analysis are less clear.     

Trade policy in the face of price and non-price strategies

When selling their products domestically or internationally, firms rely on more than just price as a strategic variable. They also rely on non-price instruments such as advertising and/or R&D investments. Any trade policy that affects or limits the use of one variable will likely have strategic consequences for the use of all the others. Using a Hotelling model with vertical differentiation we focus on how trade policy barriers alter price and non-price competition on the goods market. The main results are as follows: first, no matter whether the trade restriction (tariff) is placed on the non-price instrument or on the good itself, the foreign (domestic) firm prefers to increase (decrease) its use of its pricing tool and give up some of (increase) its use of the non-price instrument. Second, in the presence of a non-price instrument, tariffs do not always lead both firms to increase their price: it can lead the foreign firm to decrease its (final) price.