Measuring trade diversion-the case of Russian exports in the advent of EU enlargement

This paper is an attempt to assess the possible trade diversion from the Russian Federation caused by the 2004 EU enlargement to 10 Central and Eastern European Countries (CEECs). Left out of the club, Russia has been confronted with potential losses of CEECs and EU15 markets. The effect of the factual enlargement is approximated by the transformations introduced by earlier regional integration in the region. The Europe Agreements (EA) and other Preferential Trade Agreements (PTA) among the CEECs anticipated most of the transformations related to the EU enlargement, at least as far as trade is concerned. The method rests on the gravity model enriched with the Michaely indices of potential trade diversion, potential trade creation and export compatibility, as a new measure for trade diversion and trade creation. The use of the indices in this context provides several advantages over the use of PTA dummies. They constitute a more accurate measure of trade diversion, they can be correctly estimated since they are not incorporated in the bilateral importer-exporter effects and they do not suffer from endogeneity. In our exercise, the dynamic panel setting reveals to be the correct specification, from a theoretical and empirical point of view. The results of the estimations do not confirm the trade diversion hypothesis for the aggregated data. Although intra-EU25 trade increased tremendously, this was not at the expense of Russian exports. The low level of Russian exports to the EU and the CEECs could thus be caused by other factors than the EU enlargement.