Factors of trade in Europe

- We analyze how a broad set of determinants affect trade among European countries over the period 1992-2008.
- Methodologically, we first derive country-pair fixed effects over all possible pairs of export-import partners, and in the second stage we relate fixed effects with a set of influential factors.
- Geographical, cultural, and institutional factors exhibit intuitive and varying effects.
- Soft and hard infrastructures have strong beneficial effects.
- Trade between old and new EU members is of key importance in terms of trade direction.

We analyze how a set of determinants affect trade among European countries over the period 1992-2008. The factors encompass variables from the areas of geography, culture, institutions, infrastructure, and trade direction. Trade is analyzed for four types of goods: primary goods, parts and components, capital goods, and consumer goods. For each type of good we also distinguish its definition in terms of flows, intensive margin, and extensive margin. Methodologically, we first derive country-pair fixed effects over all possible pairs of export-import partners, and in the second stage we relate fixed effects with a set of influential factors. We show (i) the intuitive and varying effects of geographical, cultural, and institutional factors; (ii) the beneficial effects of soft and hard infrastructure; and (iii) the key importance of trade between old and new EU members.