The impact of EU enlargement on trade of the members - A gravity model approach

In 2004  eight Central and Eastern European (CEE) Countries, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia and the Czech Republic along with Cyprus and Malta in 2007 Romania and Bulgaria,in 2013 Croatia  joined the European Union. The eastern enlargement of the European Union (EU) constitutes an outstanding event in European history and brings with it multiple implications for the old and new members' economic affairs. By the beginning of the twenty-first century, EU tariffs on imports from the Central and Eastern European countries were almost completely eliminated. In the beginning of this process, large unexploited potentials in the trade volume between the EU and the Central and Eastern European countries were estimated. Examining the trade prospects for the new European Union (EU) member states is an important issue in the context of European eastward enlargement and greater economic integration with its immediate neighbours.

The EU enlargement not only resulted in free trade between the EU-12 and the EU-15, it also changed the EU-12’s trade policy in relation to the rest of the world.

The purpose of the essay is to model the trade of the European Union, to analyse the effects of EU enlargement in the period between 2000 and 2010 by means of a gravity model, as well as to estimate and measure the commercial growth as a consequence of the opening up of the trade in the EU. It was also the aim to measure and quantify the extent of the commercial change during the European integration and to  analyse the behaviour of bilateral trade flows  between the EU-15 members and the EU-12 countries. The gravity model of international trade was developed independently by Jan Tinbergen (1962) and Pentti Pöyhönen (1963). The model is convenient as an examination tool for many reasons such as simplicity, high explanatory ability and improved econometrics.

The quantitative study is performed on panel data from 2000 to 2010 of 27 countries of the European Union (EU-15, EU-12) with (cross section and panel data analysis) gravity model and changes in bilateral trade between the countries are observed. A panel database was compiled and a panel regression analysis was performed based on a gravity model. In aim of receiving the best regression results from the OLS an alternative version of the standard gravity equation, a fixed effect equation is calculated and run as well.