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Regional Integration And Trade Diversion In Europe

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Author Info

  • Kokko, Ari

    ()
    (European Institute of Japanese Studies)

  • Mathä, Thomas

    ()
    (Central Bank of Luxembourg)

  • Gustavsson Tingvall, Patrik

    ()
    (European Institute of Japanese Studies)

Abstract

This paper re-examines the relation between regional integration and trade by using the framework suggested by Yeats [1998] to analyze the effects of European integration. We identify the industries that experienced the largest increases in regional trade orientation during three phases of European integration, and examine the simultaneous changes in revealed comparative advantages. Our main conclusion is that there are signs of trade diversion for the earliest phase of European integration (1962-1973), when intra-regional trade increased in industries with weak comparative advantages, but not for later time periods. The main reason is that regional integration has coincided with reductions in external trade barriers, improving market access also for outsiders. At the same time, integration has promoted economic growth and import demand, which has been beneficial for outside producers. We also argue that the static concept of trade diversion is not well suited for analyzing modern integration, which aims to raise the comparative advantage of regional producers by promoting scale economies and competition. If successful, it will reduce the market shares of outsiders, but it does not constitute trade diversion: more efficient outsiders are not replaced by less efficient insiders.

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Bibliographic Info

Paper provided by The European Institute of Japanese Studies in its series EIJS Working Paper Series with number 231.

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Length: 41 pages
Date of creation: 01 Dec 2006
Date of revision:
Publication status: Published in Integration & Trade, 2007, pages 205-246.
Handle: RePEc:hhs:eijswp:0231

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Postal: The European Institute of Japanese Studies, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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Web page: http://www.hhs.se/eijs/
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Keywords: European integration; trade creation and diversion;

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  1. Drusilla K. Brown & Alan V. Deardorff & Robert M. Stern, 2003. "Multilateral, Regional and Bilateral Trade-Policy Options for the United States and Japan," The World Economy, Wiley Blackwell, vol. 26(6), pages 803-828, 06.
  2. Tamim Bayoumi & Barry Eichengreen, 1995. "Is Regionalism Simply a Diversion? Evidence From the Evolution of the EC and EFTA," NBER Working Papers 5283, National Bureau of Economic Research, Inc.
  3. Carrere, Celine, 2006. "Revisiting the effects of regional trade agreements on trade flows with proper specification of the gravity model," European Economic Review, Elsevier, vol. 50(2), pages 223-247, February.
  4. Glenn W. Harrison & Thomas F. Rutherford & Tarr,David, 2003. "Rules of thumb for evaluating preferential trading arrangements : evidence from computable general equilibrium assessments," Policy Research Working Paper Series 3149, The World Bank.
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  6. Lucian Cernat, 2001. "ASSESSING REGIONAL TRADE ARRANGEMENTS: ARE SOUTH–SOUTH RTAs MORE TRADE DIVERTING?," International Trade 0109001, EconWPA.
  7. Aitken, Norman D, 1973. "The Effect of the EEC and EFTA on European Trade: A Temporal Cross-Section Analysis," American Economic Review, American Economic Association, vol. 63(5), pages 881-92, December.
  8. Forslid, Rikard & Haaland, Jan I. & Midelfart Knarvik, Karen Helene, 2002. "A U-shaped Europe?: A simulation study of industrial location," Journal of International Economics, Elsevier, vol. 57(2), pages 273-297, August.
  9. Diao, Xinshen & Somwaru, Agapi, 2000. "An Inquiry on General Equilibrium Effects of MERCOSUR--An Intertemporal World Model," Journal of Policy Modeling, Elsevier, vol. 22(5), pages 557-588, September.
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