How Does European Integration Change the Gravity of Trade?

Abstract

Purpose – This study examines whether the influence of the gravity model after economic integration is strengthened or weakened by variables through trade volume between the EU and eurozone member states. Design/Methodology/Approach – We analyzed the effect of economic integration of the EU and the Eurozone through the gravity equation, the result generally supports the basic assumptions of a gravity model. Findings – As economic integration goes deeper, the trade-creation effect becomes larger. In particular, in the case of the Eurozone, which even achieved monetary integration, the trade-creation effect increased dramatically compared to the intra-regional trade of EU member states. In European economic integration, the economic scale effect to increase trade volume weakened, and the distance effect, which decreases trade volume, became stronger. Research Implications – When economic integration deepens, the trade volume between member countries increases dramatically, and it can be especially advantageous when member countries are geographically close, or are located in the center of other membership countries. However, trade volume decreased by the distance effect is smaller compared to the degree of trade creation within economic integration, and it was found that the European integration acts favorably on trade creation for its member countries.