Trade effects of the Europe agreements: A theory-based gravity approach

Abstract

In this paper, we develop a new version of a theory-based gravity equation to properly account for the relative price indices initially proposed by Anderson and van Wincoop (2003). The partially time-varying character of our multilateral resistance variables overcomes the bias present in earlier studies that solely rely on country or country pair fixed effects. Applying the augmented gravity equation to the process of European Union (EU) integration during the 1990s, we find robust evidence that the Free Trade Agreements (FTAs) with the Central and Eastern European Countries (CEECs) have substantially increased intra-group trade, in the case of the Czech and Slovak Republic and Slovenia at the expense of the Rest of the World (ROW). Since decreasing multilateral trade resistance negatively influences a country's bilateral imports but may be positively correlated with a bilateral FTA, earlier East-West studies, which ignored the relative price term's time-varying character, tend to be downward biased. Indeed, our results indicate that once we correct for the omitted variable bias, the FTAs with the CEECs created 7 to 20% more new trade compared with the scenario where only time-invariant country pair effects were included.free trade agreements, gravity equation, Central and Eastern Europe, panel data,

Agro-food exports variety from the Central and Eastern European countries

“…romer (1994) demonstrates in a simple calibration that the trade liberalization increases the number of the traded varieties as a source of welfare gains. Spies and Marques (2009) applying the augmented gravity equation find that the free trade agreements between the EU and the cEEcs during the 1990s substantially increased intra-group trade for the czech and Slovak republics and Slovenia at the expense of the rest of the world trade. Bojnec and Fertő (2010) applying the panel regression analysis confirmed that the cEEc agro-food quality differentiation on the EU-15 markets during the pre-accession is explained by comparative advantages from the relative factor endowment.…”

Islands in Trade: Disentangling Distance from Border Effects

“…We check the robustness of our baseline results using an approach to multilateral resistance that is derived directly from equation (7), whose denominator term models multilateral trade resistance through all variables that also influence the bilateral resistance to trade, weighted by regional income shares. Since these shares are time-varying, we can overcome the bias present in estimations that solely rely on country (pair) fixed effects to proxy for the multilateral resistance terms (Spies and Marques, 2009). In order to be able to apply standard panel data estimation techniques, the multilateral resistance variables are written as a Taylor series approximation as proposed by Baier and Bergstrand (2009):…”

“…9 The most basic formulation of the gravity model consists of explaining bilateral flows as a direct function of the two partners' economic size (measured in terms of GDP, GDP per capita and/or population) and as an inverse function of the distance between them (Anderson, 2011). In the current paper we propose an extension of the approach taken in Spies and Marques (2009) to incorporate a simplified version of the trade cost function of Novy (2013) and Feenstra and Romalis (2014), who consider two types of trade costs in the context of international trade: the usual "iceberg" _________________________ 7 Some other extra costs arise because the maritime transport mode is slower, and the time loss is sometimes unexpected when the route has to be cancelled due to adverse sea conditions. This time delay may be much more costly for a firm than just the other costs to be paid, but it is hard to place a monetary value on it.…”

“…Moreover, the large scale of operations leads to a higher number of lines connecting ports and, thus, increasing the competitive pressure in the transport market and, as a result, lowering the cost of transport services. 9 These models have been applied to trade Metcalf, 2005, 2006;Papazoglou et al, 2006;Armstrong 2007;Spies and Marques, 2009;Marques, 2011), migration (Gil-Pareja et al 2006;Marques, 2010), FDI (Head and Ries 2008), and tourism (Eilat and Einav, 2004;Gil-Pareja et al, 2007;Santana et al, 2010;Fourie and Santana 2013;Rosselló and Santana-Gallego 2014). Moreover, this specification has also been used both in the international and regional context (see, for the case of Spain, Sansó et al, 1990, Sanz, 2000and Gil-Pareja et al, 2005 variable cost, which depends on distance, and a specific trade cost, which exists only for some trade partners (in our case, islands).…”

The economics of the Fifth Enlargement: Trade, migration and economic synchronicity

“…the responses by the rest of the world to changes in trade intensity within a preferential trade area. Spies and Marques (2009) build on the model originally proposed by Anderson and Wincoop (2003), but they extend it by developing a wealthier measure of multilateral trade resistance that goes beyond relative prices and covers a wider set of factors affecting trade flows. Empirically, the paper applies the recently developed fixed-effect vector decomposition method (Plu¨mper and Troeger 2007), which corrects for the estimation bias arising from the presence of time-invariant variables in the panel.…”