The impact of international trade on EU member states performance

Abstract

One of European Commission priority is to achieve balanced and progressive trade policy that ensures boosting EU economic growth. However, growing international trade flows do not necessarily guarantee economic growth. The impact of international trade on the growth of countries is a rather widely discussed issue. Previous empirical investigations have shown heterogonous results. Some of the previous studies examining effect of international trade have revealed that export and/or import had a positive impact on countries economic performance. However, the results of other studies indicate that international trade impact on countries growth is insignificant or even negative. In this study, we create the hypothesis that the effect may vary according to the level of productivity achieved by the countries and that it may occur after a certain period of time. The aim of this investigation is to evaluate impact of international trade on EU countries performance depending on the level of productivity achieved by the countries and taking into account long-term effects. Moreover, in the last decade two different paradigms of the impact of foreign trade on growth have emerged: export led growth (ELG) and import led growth (ILG). The study made it possible to test these theories empirically. We used: i) the cluster analysis for divide countries into groups by productivity level; ii) ordinary lest square (OSL) and fixed effect (FE) estimator, in regressions model including countries dummies and times lags, for investigation international trade impact. Investigation results reveal that both import and export positively influenced performance of EU member states and there is no significant difference on impact depending on productivity level of the country in case of export, bur import impact is stronger in more developed countries with higher productivity level. Moreover, statistically significant effect was found to occur in the first year and lasts for two years.