FEEM Research Seminar on “Scale Economies in European Trade”
12:30 - 14:00
Using the gravity framework, I investigate whether being part of the European Union (EU) reduces trade frictions between European countries. First, I show that European trade exhibits significant trade frictions in 26 manufacturing sectors, as measured by economies of scale in trade costs: a 10% increase in trade volume corresponds on average to a 0.73% decrease in trade costs. Second, I find that the EU expansion over the last 30 years did not affect scale elasticities in aggregate terms, as an overall reduction in trade frictions would have implied. Some sectors, however, do exhibit a reduction in scale elasticities consistent with a decrease in fixed trade costs. Investigating scale elasticities more in depth, I find that they do not depend on product-specific characteristics. On the other hand, country-specific institutional variables, such as the importer’s level of corruption, play a role: exporting to the most corrupted country in the sample entails half the gain from additional trade volume than exporting to the least corrupted one.