The Contribution of Intra-Regional and Extra-Regional Trade to Growth: Evidence from the European Union

Abstract

Since the formation of the World Trade Organization, the proliferation of regional trade agreements has raised concerns regarding the prospects of multilateral trade liberalization. The objective of this paper is to assess whether trade among member countries (intra-regional trade) contributes more to output growth than trade with nonmember countries (extra-regional trade) using 13 European Union states. The empirical framework first estimates a series of Granger causality tests for the trade-growth relationship for EU countries in our sample. Next, the marginal effects of intra-regional and extra-regional trade on economic growth in the EU are estimated using a standard growth model with trade intensities as our focus variables. In addition to the basic influences of investment and population growth, the results confirm the importance of trade openness for growth. More importantly, they show that intra-regional trade has had a lesser impact on growth in output per capita than extra-regional trade by almost 30% over the period 1980-2003.