Hub-and-Spoke or Else? Free Trade Agreements in the 'Enlarged' European Union

Abstract

The object of this paper is to estimate the effect of European Union eastwards enlargement process on trade patterns in the Union. In particular, we intend to investigate whether and how the EU Free Trade agreements with CEECs have exerted a different impact on centre-periphery and intra-periphery trade relationships.

This paper analyses bilateral trade flows between eight CEECs and EU-23. We estimate a gravity equation using a system GMM dynamic panel data approach. Results support the assumptions that gravity forces and persistence effects matter. With respect to the effect of free trade agreements, evidence is found that Free trade agreements between EU countries and CEECs matter. However there is also evidence that the presence of intra-periphery agreements helped expand intra-periphery trade and limit the emergence of a hub-and-spoke relationship between CEECs and EU.

This results have important policy implications for the trade strategy of future EU members of the Southeastern European Countries as well as of the Southern Mediterranean Countries. According to the empirical results these countries should move towards a regional free-trade area as exemplified by the CEFTA and the BAFTA to avoid hub-and-spoke effects.

Keywords: Trade flows, regional integration, EU eastward enlargement, gravity model, dynamic panel data

JEL Classification: F13, F15, C13, C23