Border effects in the enlarged EU area: evidence from imports to accession countries

Abstract

By looking at imports of Eastern European countries, we provide novel insights on the importance and magnitude of border effects and on how they are linked with technical barriers to trade. All Central Eastern European Countries (CEECs) traded with themselves more than with other countries. We grouped products into three categories; depending on the importance of applicaple technical barriers. Our results show border effects are the largest for products, where we expect to have the most important technical barriers. We assess if border effects changed over the transition period and we find that for products where technical barriers are less important the magnitude of border effects was declining at the end of the 90s.

Notes

¹ See, among others, Helliwell (1995, 1997, 1998, 2000), Hillberry (1999, 2001), Wei (1996), Wolf (1997, 2000), Head and Mayer (2000), Helliwell and Verdier (2000), Nitsch (2000), Anderson (2001), Evans (2001, 2003), Hillberry and Hummels (2002), Anderson and van Wincoop (2003), Chen (2004).

²Anderson and Wincoop (2003) argue that bilateral trade is not only influenced by bilateral trade barriers but also by the average trade barriers that both partners face with all their trading partners, which they call ‘multilateral trade resistance’. Chen (2004) instead of constructing the multilateral resistance terms included country fixed-effects.

³ Information costs captured partly by average firm size calculated for each sector and by using three dummies for industries according to whether search costs are assumed to be either lower or higher.

⁴ EU 15 Member States, with Belgium and Luxembourg aggregated as one country, while the number of accession countries varies by reporting countries and years depending on the data availability.

⁵European Commission (1998), ‘Technical Barriers to Trade’, Volume 1 of Subseries III Dismantling of Barriers Of the Single Market Review, Office for Official Publication, Luxembourg

⁶ Baldwin (2000) reporting on Majone (1994) states a complete failure of the old approach to technical harmonization within the EU. It is such failure in the implementation of the procedure that makes old approach products the ones still interested by higher technical barriers to trade.

⁷ The conversion from ISIC to NACE70 classification was necessary in order to be able to merge the production data with the trade data.

⁸ Products under the mixed approach could not be separated into the old and new approach, partly due to the conversion from ISIC to NACE70 and partly because for certain products both approaches apply. Details on the industries covered by our data are provided in Annex II.

⁹ For internal distance it is meant the distance a country from itself (Head and Mayer, 2002)

¹⁰ Defining state the smallest unit for which trade data are available and districts the smallest unit for which geographic information is available, effective distance between two states is defined as the solution of an equation summing trade between all the districts as a function of district-to-district distances. See Head and Mayer (2002) page 13.

¹¹ In other words, it is not the difference between the two aggregation schemes that matters. It's the bias in the relative measure of distance (international vs. internal) imposed by using one or the other which is crucial in raising illusory border effects.

¹² Adjacency dummies in the gravity equations tend to be highly significant. This can be partly due to the fact that neighbouring countries can be expected to have an additional stimulus to trade because of similarity of tastes, an awareness of common interests, some personal and business linkages especially when the border regions are highly populated or when in the past the border was somewhere else (as in the case of some Central and Eastern European countries). Aitken (1973) also argues that neighbouring countries are likely to experience significant additional amounts of international trade in mainly locally traded goods, especially where border regions are densely populated, as in much of Europe. Therefore, we include a dummy for countries which share common borders and we expect to obtain positive coefficients.

¹³ See Rose and Wincoop (2001), Chen (2004).

¹⁴ CLAD estimator permits nonnormal, heteroscedastic and asymmetric errors. CLAD is a semiparametric approach which uses the method of least absolute deviations to obtain regression coefficient estimates by minimizing the sum of absolute residuals. It is a generalization of the sample median to the regression context just as least squares is a generalization of the sample mean to the linear model (Chay and Powell, 2001).

¹⁵ For the year 1997 they found slightly smaller border effects for both old and new approach products, while for mutual recognition products the border effects were not significant.

¹⁶ The test we performed was a variation suggested by Drukker (2002) of Pagan and Vella (1989) test in order to correct for size distortions as in Skeels and Vella (1999). Using the parametric bootstrap procedure suggested by Drukker (2002) the test still has reasonable power for samples >500, as in our case.

¹⁷ As reported in Chay and Powell (2001) for censored panel data with fixed effects, maximum likelihood estimation methods will generally be inconsistent even when the parametric form of the conditional errors distribution is correctly specified.

¹⁸ Due to difficulties in achieving convergence, equations including partner and reporting country industry-specific fixed effects could not be estimated with the CLAD procedure.

¹⁹ The same method was used for the same index by Chen (2004).

²⁰ Finland and Sweden have been considered as a country concentrated in one region whose main cities are Helsinki and Stockholm. Data on GDP provide sufficient evidence main activities are concentrated in that region. NUTS2 regions have been used for Portugal and Ireland. Also Cyprus has been considered as one region which includes only the Greek part, since data on the Turkish part of the island were not found.

²¹ Cyprus has been considered as one region, since the lack of geographical disaggregated data. Therefore Helliwell and Verdier (2001) area based formula () has been used for calculating its internal distance and does not vary between the arithmetic and the harmonic mean. The choice of this particular formula has been motivated by the particular shape of Cyprus.