The Trading Potential of Eastern Europe

This paper fits a gravity model to the trade of 76 market economies. It then applies the model to data on East European economies to estimate what their trading potential might have been, had behaved like market economies in the mid-1980s. At existing levels of national income, the liberalization of Eastern Europe and the Soviet Union is unlikely to affect their mutual trade and trade with developing countries, but it will increase trade with industrial counties by factors of three to thirty. West Germany and the USA are the principal beneficiaries of this new trade, increasing their exports and imports by over 20%. Trade must flow both ways, however: the West cannot increase its exports to the East without correspondingly increasing its imports.