EU integration and structural gravity: A comprehensive quantification of the border effect on trade

Abstract

Abstract This study delivers a comprehensive picture of EU trade integration in manufactured goods using a structural gravity framework together with a flexible two‐step estimation approach. With panel data, time‐invariant effects on trade are typically absorbed by fixed effects. This paper shows how to include both time‐variant and time‐invariant effects on trade into general equilibrium counterfactual experiments. Results show that the time‐invariant effects or, in other words, the initial integration degree of the incumbent EU‐15 members should not be neglected as it already increased intra‐EU trade shares by 70% until 1995. Since then, trade integration has not deepened for the EU‐15, while trade shares among the newly joined central and eastern EU members doubled. A further deepening of the Single Market could potentially unlock another 50% increase in trade and around 3% in welfare (real income).

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