REGIONAL INTEGRATION AND TRADE DIVERSION IN EUROPE

Ari Kokko (), Thomas Mathä () and Patrik Gustavsson Tingvall ()
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Patrik Gustavsson Tingvall: European Institute of Japanese Studies, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

No 231, EIJS Working Paper Series from The 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.

Keywords: European integration; trade creation and diversion (search for similar items in EconPapers)
JEL-codes: F12 F15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec and nep-int
Date: 2006-12-01
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Published in Integration & Trade, 2007, pages 205-246.

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Persistent link: http://EconPapers.repec.org/RePEc:hhs:eijswp:0231

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