The intra-industry trade dynamics in CEE countries: The role of trade agreements

Abstract

This paper investigates the impact of regional trade agreements (RTAs) on the development of intra-industry trade (IIT) for eight Central and Eastern Europe countries (CEE) from 1997 to 2019. The aim of the paper is to compare and explain the possible heterogeneous impact of different RTAs on IIT across countries while controlling for differences in development levels between economic integration member states. Our analysis is based on country-product level data obtained from UN Comtrade. The main hypothesis of the paper is that the CEFTA and EU integration agreements have a highly positive effect on IIT in comparison with other RTAs. However, the scope of the impact varies across countries, primarily depending on the economic development asymmetries that are in this paper proxied by the GDP per capita. We developed and estimated an augmented structural gravity model using Pseudo-Poisson Maximum Likelihood Estimator. The main contribution of our paper is the inclusion of the FTA-economic development gap interaction term, which enabled us to enrich the empirical findings of the research. Our results show that the main hypothesis holds, but also that an increase in economic asymmetries between integration members negatively affects IIT, thus indicating potentially increasing trade adjustment costs for new member states of an integration. These results go in favor of EU pre-integration and post-integration policies that have the goal of diminishing the economic development gap between future and present integration members.