## The Future Flow of Goods in the Enlarged EU

### Authors

S Vincent, Danish Transport Research Institute, DK

### Description

In order to forecast future capacity problems and public investment in the existing transport system long-term dynamic physical trade flows in the enlarged EU are modeled by using a dynamic panel data model.

### Abstract

In order to forecast future capacity problems and public investment in the existing transport sys-tem long-term dynamic physical trade flows are modeled. The methodology involved several components. First, a dynamic panel data model for foreign trade is estimated for the EU15 plus two EFTA countries on the period 1967-2002. This involves the estimation of a number of fixed effects for each country. In order to apply the model to the new EU countries, similar fixed effects must be specified for these countries, which is the second step in the methodology. The third step is the disaggretion of growth rates of aggregate bilateral trade to growth rates for each type of commodity. These growth rates of bilateral trade among 26 countries ordered by type of goods are then inserted into a freight traffic model in order to project modal split and route choice.

The basis is first a gravity model for world trade. Deardoff (1995) shows that the gravity equation can be justified by standard international trade theory. The originality of the econometric formu-lation is that we estimate a dynamic gravity equation, accounting for the usual bias involved in dynamic panel models by using appropriate econometric methods such as Generalized Methods of Moments (GMM). This is an improvement over previous econometric practice, as dynamic models make it possible to capture gradual adjustments to changes in the explanatory variables. A shock to the economy will thus affect more than one period.

The EU enlargement and the integration process of the new members have been crucial factors in solving the problem. The gravity model is used for evaluating the consequences of economic growth and the effect of the integration of the new EU members on the trade flows. Gravity mod-els? capacity for explaining the trade flows between countries has largely been verified empirically.

Gravity models claim that the size of the trade flows is explained by three factors reflecting the potential supply of the exporting country, the potential demand of the importing country and the commercial flow resistance between the partners. The gravity equation is obtained by replacing these three factors by the underlying variables, i.e., national income, population, distance and the existence of trade agreements. First, the methodology consists in estimating the coefficient of the so-called gravity variables in order to evaluate their explanatory power in the exchange explana-tion. A second step consists in applying these estimates to each country data.

The gravitation model is estimated on a panel sample for the period 1967-2002 from the CHELEM database (Comptes Harmonisés sur les Echanges et L?Economie Mondiale, Harmonized Accounts on Trade and World Economy). This database has been constructed by the Centre d?Etudes Prospec-tives et d?Information Internationale (CEPII). The database contains among other time series for the world GDP, populations, real exchange rates, values of exports and imports in constant prices. Moreover data on distances between countries (as a proxy for transport costs) and dummies for common frontiers and common languages are also available.

The model is estimated on EU15 and two EFTA countries. We find that a dynamic three-way-effects gravity equation based on Egger?s (2000) static formulation is the best-fitted econometric model, when choosing among fixed effects and random effects models.

It is not considered relevant to estimate the model on trade flows involving the new EU members, as the data covers a time period when they have been undergoing dramatic transition. This means that fixed effects are not available from the estimation for these countries. These are instead es-timated in an auxiliary regression.

We then translate the growth in trade into a growth in tons and allocate the general growth into a growth per commodity.

A set of growth rates for bilateral trade by each of eleven commodity types is obtained for all relations be-tween the 26 countries. These growth rates are applied in a freight traffic model, which provides modal split and route choice. Results are illustrated on maps, particularly those affecting Denmark and the Nordic coun-tries.

References

Deardorff, A. (1995), Determinants of Bilateral Trade: Does the Gravity Work in a Neoclassical World? National Bureau of Economic Research (Cambridge, MA) Working Paper No. 5377.

Linneman, Hans. An econometric study of international trade flows. Amsterdam: North Holland, 1966.

#### Publisher

Association for European Transport