Production networks in Europe: A natural experiment of the European Union enlargement to the east

Abstract

This paper focuses on the 2004 enlargement of the European Union to the East and treats it as a natural experiment to investigate two issues: first, whether there has been a trade creation effect in final and intermediate goods and second, to what extent this effect has been more pronounced for final or for intermediate goods. Using difference-in-differences analysis, we find that the effect of the 2004 EU enlargement has been positive for both intermediate and final goods trade, and it is in general greater for final goods. Using a generalized gravity model of trade that controls for the multilateral resistance and bilateral time-invariant factors, we estimate an increase in bilateral trade of 28% for final goods and 24% for intermediates. However, the effects are heterogeneous by sub-sector and indicate that the main trade gains were for non-durable consumer goods and food and beverages primary and processed products.