Analysing EU sectoral trade integration with gravity models

International trade flows are often considered to be indicators of links between the economic centres of the region, thus representing links between the economic and spatial concepts. Therefore the approach based on implementing the law of gravity for the study of international trade flows has been widely used in recent years. Previous studies have shown that the gravity equation is the most successful model for explaining regional trade patterns.

The European Union now having 28 members has reached though its unified market and monetary union a high degree of economic integration.  This is a unique process not only in Europe but also in the world.

In order to evaluate the EU economic integration effects across sectors, we build up a sectoral gravity model which allows us to capture the implicit benefits of EU trade, by controlling for the explicit determinants of trade. According to the value of the distance coefficients we try to prove with fixed effect panel estimation in which sectors or industries is the trade integration  greater compared to other industries (which are the most and which are the least trade integrated sectors in the EU.)

The gravity model is a mathematical model based on analogy with Newton ‘gravitational law which has been used to analyse spatial interaction between two or more points like the gravity in physics. Gravity model based studies have achieved empirical success in explaining various types of flows, including migration, commuting, goods, money capital information and international trade. The model is convenient as an examination tool for many reasons such as simplicity, high explanatory ability and improved econometrics.

Trade within Europe is still impeded by significant barriers. In particular, there remain many non-tariff barriers, including so-called "Technical Barriers to Trade.” These barriers result from regulations by requiring specific product characteristics or production processes. The sectoral trade integration analysis is deepened with capturing TBT ("Technical Barriers to Trade )“coefficient compiled for separate sectors. 

The aim of this paper is to explore the implicit trade obstacles or barriers that still exist among EU members and to prove the trade-reducing effect of such remaining obstacles in separate sectors. Our working hypothesis is that different types of goods might face diverse entry barriers, and thus their gravity equation coefficients would differ across sectors.

Key words:EU economic integration, trade, panel models