Scandinavian Working Papers in Economics

EIJS Working Paper Series,
Stockholm School of Economics, The European Institute of Japanese Studies

No 231: REGIONAL INTEGRATION AND TRADE DIVERSION IN EUROPE

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

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

JEL-codes: F12; F15

41 pages, December 1, 2006

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