A dead-end tunnel or the light at the end of it: The role of BRICs in European exports

Emerging countries are gradually becoming the core of the world's middle class concentration and their demand accounts for a steadily increasing share of European exports, yet studies on determinants of trade with these markets, especially on the sectoral level, are lacking. In this article we use a dynamic nonlinear cointegrating approach to better understand trade factors relevant for European exporters in the BRIC (Brazil, Russia, India and China) markets across industries. Results show that all trade determinants in our models, i.e. exchange rates, relative prices and foreign demand, are relevant for European exports to the BRICs, although their impact is heterogeneous across countries and industries. We then apply cluster analysis to group exports that respond similarly to changes in major trade determinants in order to identify current bottlenecks and reveal opportunities for European exporters in the BRIC markets. We find that trade patterns are stable over time; there is an asymmetric response to exchange rate movements, and that three clusters, with distinct characteristics, comprise over 90% of European exports to the BRIC’ markets. Results shed some light on the drivers of European-BRICs trade and the way recent geo-political and economic developments in BRICs might affect European exports.