Decomposing a decade's growth of Central and Eastern Europe's trade

After the breakdown of the central planning system, Central and East European countries (CEECs) took considerable effort in liberalising their economies leading to lasting changes in CEEC trade. As a result, between 1996 and 2004 almost all of these countries displayed very high growth rates of both exports and imports, exceeding OECD and Russian performance. These trade developments are described and interpreted in this note on a descriptive rather than an analytical basis. First, trade volumes by goods categories are examined to account for what kind of goods are the major trade growth drivers. In general, growth in exports and imports is mainly driven by goods used in production rather than consumer goods. Specifically for the Central and East European EU members (EU-8), export and import growth is mainly driven by capital goods and two-way trade in a special subgroup of intermediate goods, i.e., parts and accessories of capital goods. This result can be associated with increasing offshoring activities between the old EU member states and the new EU-8 countries. A closer look at EU-8 exports to and imports from Germany confirms this finding: EU-8 states tend to import parts and accessories of capital goods from Germany to produce and export parts and accessories of capital goods or final capital goods to Germany. Second, the effects of liberalisation on the variety versus the intensity of trade are described. Here as well, CEEC growth in trade at the extensive margin is driven by intermediate rather than consumer goods. Considering the import side this finding has important implications: While more consumer goods “only” have static welfare effects, a higher input variety might signal a change of the economy’s state of technology. The author is a graduate student at the Department of Economics, University of Regensburg and a research assistant at the OEI. I am grateful to Richard Frensch for many helpful discussions and guidance on this note.