The baltic sea regional integration and international trade: A gravity model approach

Abstract

The main feature characterizing recent European integration processes is integration of national economies with different historical backgrounds and structures in the context of EU eastward enlargement. The eastward enlargement of the EU poses a major challenge for both the so-called old member countries (EU15) and the candidate countries (CC12) in order to adjust with all economic, social and political changes. The most expedient economic factor in pushing economies into integration is international trade. International trade flows are often considered to be indicators of links between the economic centres of the region, thus representing links between economic and spatial concepts. Previous studies have shown that the gravity equation is the most successful model for explaining regional trade patterns, which incorporates theoretical and empirical advantages related to it (see Baldwin 1994; Sen and Smith, 1995, Eichengreen and Irvin, 1998; Feenstra, 1998; Estevadeordal, et al 2002a and b). This paper aims at exploring international trade flows of the countries that are involved in the EU eastward enlargement process using a gravity model-based approach. The regional integration effects are handled as the deviations from the volume of trade predicted by the baseline gravity model, which expresses the impact of traditional gravitational forces like the size of economy, level of economic development and distance. Attention is given to analysing differences in behaviour of bilateral trade flows of two groups of countries, the EU15 and CC12. The EU eastward enlargement candidate countries (CC12) are forming two groups: 1) the Luxembourg group of candidate countries (formed in 1997): Poland, the Czech Republic, Hungary, Estonia, Slovenia, Cyprus, and 2) the Helsinki group of candidate countries (formed in 1999): Latvia, Lithuania, Bulgaria, Romania, Slovakia and Malta. The first round of eastward enlargement in 2004 involves ten candidate countries out of twelve. Bulgaria and Romania will have a chance to join during the next round of enlargement. This paper is divided into four main parts. Section 2 views theoretical foundations of using gravity equations for exploring international trade flows. In section 3, the main specifications of the gravity equations are presented. Section 4 explains the main empirical results obtained by using the gravity approach for exploring bilateral trade flows of the two groups of countries, the EU15 and CC12. Attention is paid to defining possible regional clusters that influence bilateral trade relations of the countries. In section 5, bilateral trade flows within the Baltic Sea region (BSR) countries are analyzed, emphasizing the BSR role in the Baltic States' trade integration. The empirical part of the paper draws mainly on IMF trade statistics and data of the World Bank and the Baltic States' statistical offices. © Springer Berlin - Heidelberg 2005.