Trade and the Euro: effects on bystanders

ABSTRACT

This article investigates trade effects of the euro focusing on the impact on bystanders. We use data for Swedish firms and examine the impact on exporting firms’ intensive and extensive margins of trade. Our result shows an overall increase in Swedish firms’ exports to the euro area after the introduction of the single currency, indicating that the euro has decreased trade costs also for outsiders. In addition, we find important heterogeneity in the sample, suggesting that it is the large majority of small firms that has increased trade flows with the Eurozone the most.

KEYWORDS:

• Euro
• trade diversion
• exports
• heterogeneous firms

JEL CLASSIFICATION:

• F10

Acknowledgments

We thank conference participants at ETSG in Birmingham, 2013, Lund Seminar Series in International Economics 2013, and SNEE in Mölle, 2014. In addition, we thank Hans Carlsson for his advice.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For an overview of this literature, see the surveys by Baldwin (2006) and Flam (2009).

² At the time of the implementation of the euro, Sweden’s exports to and imports from the Eurozone accounted for 42% and 52%, respectively, of Sweden’s total exports and imports.

³ Notice that trade diversion in this context differs from the traditional trade-diversion effects in custom-union analysis since there will be no negative impact on within-union countries. The formation of a customs union eliminates tariffs between member countries and creates a tariff-revenue loss on imports for the government. A common currency, on the other hand, involves no such loss. The removal of currency-related trade costs will only lead to lower prices that benefit consumers of imported goods.

⁴ Although we have data for the period 1997–2011, we focus our analysis to the 1997–2003 period as the effect of the euro is expected to be more pronounced in the early years just after its implementation in 1999. This also allows us to ignore trade effects from the EU enlargement and the 2008 financial crisis. We do, however, estimate the effect for the whole period as a robustness check.

⁵ We divide our sample in small, medium and large firms defined by having 1–49, 50–249, and +250 employees, respectively. This gives us 9127, 2297, and 515, small, medium and large firms, respectively.

⁶ Estimating the effects for the period 1997–2011 provides very similar results for the extensive margin. For the intensive margin, the overall positive effect of the euro remains but with a lower magnitude (around 7%), while the heterogeneous effect disappears. These results are available upon request.

Additional information

Funding

This work was supported by the Jan Wallander and Tom Hedelius Foundation [P2016-0114] and Torsten Söderberg’s Foundation [ET3/13].***