European integration, intra-industry trade in vertically differentiated products and the Balkan countries.

Abstract The aim of this paper is to examine the relation between the integration process and the intensity of intra-industry trade between two countries of different levels of development. Our theoretical model and results indicate that trade liberalization and the establishment of the Free Trade Areas between the Balkan countries and the EC have led to the growth of the intra-industry trade between Greece--EC member state--and those countries. The main instruments of this process have been the Europe Agreements and the Stabilization and Association Agreements between the Balkan countries and the EC. The paper presents a model in vertically differentiated products in a Free Trade Area context and proceeds to depict the intensity of intra-industry trade between Greece and the Balkan countries.

Keywords Intra-industry trade * Customs Union * Transition economics * Balkan countries

JEL F14 * F15

Introduction

Intra-industry trade, i.e., the simultaneous exports and imports of the same good, is associated with differentiated products and with intermediate goods, (Grubel 1967; Grubel and Lloyd 1971, 1975; Balassa 1963, 1965, 1986; Gray 1973, 1980; Greenaway et al. 1994; Tharakan 1981; Ethier 1979, 1982). Regarding product differentiation, vertically differentiated products (i.e., products close substitutes to consumption) represent the main volume of intra-industry trade. While horizontally differentiated products (i.e., close substitutes to both production and consumption) concern mainly trade among industrial countries, vertical differentiation is the dominant pattern of intra-industry trade in the case of countries of different levels of development, (Gray and Martin 1980; Willmore 1978; Lancaster 1979, Ch. 6 and 8, 1980; Caves 1981; Caves and Williamson 1985; Brander 1981; Shaked and Sutton 1987).

The purpose of this paper is to specify the extent of intra-industry trade between Greece, a member-state of the European Community (EC) and the Balkan countries in the light of the Europe Agreements and the Stabilization and Association Agreements. These agreements launched a trade liberalization process, between the Balkan countries and the EC member-states, through Free Trade Areas, Free Trade Areas and Customs Unions represent a second best solution (relatively to a global trade liberalization), which have a positive impact to intra-industry trade (Loertscher and Wolter 1980; Havrylyshyn and Civan 1983). Europe Agreements were the first step of integrating Bulgaria and Romania to the EC, ending to their accession to the EC in 2007. Stabilization and Association Agreements also represent the first step of integration of Western Balkan countries to the EC. Their future entry is estimated to take place in the horizon of 2015. This process brings up interesting questions about its impact to their trade pattern.

The first chapter depicts the process of integration of the Balkan countries to the EC. The second one presents a model on intra-industry trade based on vertical differentiation. The third chapter refers to the measurement of intra-industry trade. The fourth measures the extend of intra-industry trade between Greece, member-state of the EC and the countries under examination; the fifth aims to estimate the relation between the expansion of the Greek Multinational Corporations (MNC's) to Balkan countries and the intra-industry trade.