In Search for Determinants of Intra-Industry Trade within an Enlarged Europe

Abstract

Most trade between the European Union (EU) and the Central and Eastern European Countries (CEEC) is inter-industrial in nature, based on comparative advantages. However, recent studies have uncovered structural changes in the nature of trade, the most unexpected being the rapid increase in Intra-industry trade (IIT). In this paper we characterise the dynamics of the CEEC-EU trade using several methodologies that evaluate the type of trade and price-quality ranges. The analysis confirms that there was a significant decline in inter-industrial trade and an increasing specialisation in vertical IIT. Moreover, we found substantial differences in the unit values of exported and imported goods, which suggest that the increasing weight of IIT in the EU-CEEC trade does not result from the factorial contents convergence of the traded goods. Therefore, these trends indicate the emergence of a new division of labour in the enlarged EU. Using a panel data approach we also identify the determinants of vertical and horizontal IIT. The results allow us to conclude that there are some differences in the determinants of these types of trade, although both seem to have a statistically significant relationship with country’s size and Foreign Direct Investment flows.