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

By De Benedictis, Luca; De Santis, Roberta et al. | The European Journal of Comparative Economics, July 1, 2005 | Go to article overview
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Hub-and-Spoke or Else? Free Trade Agreements in the 'Enlarged' European Union


De Benedictis, Luca, De Santis, Roberta, Vicarelli, Claudio, The European Journal of Comparative Economics


Abstract

The object of this paper is to estimate if and how the Central European Free Trade Agreement (CEFTA) and the Baltic Free Trade Agreement (BFTA) exerted a significant impact on intra-European trade, effectively reducing the influence of the European Association Agreements (EAs) in shaping the European trade structure has a hub-and-spoke system - with the EU15 being the hub and the CEECs the spoke. This paper analyses bilateral trade flows between eight CEECs and EU15 and between the CEECs themselves. 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 CEECs matter: There is evidence that the presence of intra-periphery agreements helped expand intra-periphery trade and limited 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 regonal free-trade area as exemplified by the CEFTA and the BFTA to avoid "hub-and-spoke" effects.

JEL Classification: F13, F15; C13, C23

Keywords: trade flows, regonal integration, EU eastward enlargement, gravity model, dynamic panel data

(ProQuest Information and Learning: ... denotes formulae omitted.)

[...I what I want to achieve is not a 'hub and spoke' network of bilateral agreements between the EU and its partners, but a truly integrated regional approach [...I

Peter Mandelson, EU Trade commissioner2

1. Introduction

While the economic analysis of Free Trade Agreements (FTAs) has reached the status of a well established research area in theoretical and empirical international trade, "... far less is known about the more complex economics when FTAs overlap in a huband-spoke system" (Kowalczyk and Wonnacott, 1992). This may be the deep-rooted reason inducing Peter Mandelson to prefer for the EU and its regonal partners a 'truly integrated regional approach' to a 'hub-and-spoke network of bilateral agreements'. In spite of that, the goal of this paper is not to find out if FTAs that take the hub-andspoke form have to be preferred or not with respect to other possible forms that FTAs could take. This paper examines the issue from an empirical perspective, focusing on the effects of FTAs in Europe in terms of boosting trade flows between the core Europe (EU15) and the CEECs3 and among the CEECs themselves. In particular, we look for empirical evidence showing whether and how the Central European Free Trade Agreement (CEFTA) and the Baltic Free Trade Agreement (BFTA) exerted a significant impact on intra-European trade, effectively reducing the influence of the European Association (EA) in shaping the European trade structure has a hub-and-spoke system with the EU15 being the hub and the CEECs the spokes.4

We quantify these effects using a panel of bilateral export flows starting from 1994. The choice of the starting year is not casual. Although the formal begnning of negotiations for eastward EU enlargement is fairly recent, the CEECs accession process somehow began shortly after the free market system got under way. In fact, since the early 1990s, the acceding countries have been signing bilateral agreements with the EU i.e. the EA agreements - which have represented an advance on the path towards integration, through a progressive liberalisation of intra-European trade. On the other hand, in 1992 Czech and Slovak Republic, Hungary and Poland gave orign to the CEFTA, and in 1996 Slovenia joined CEFTA as a full member. In 1994 the BFTA also entered into force. Since then, the CEECs signed several bilateral trade agreements among themselves.

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