European Enlargement and Regional Economic Clusters: the Recent Trends and New Challenges

 

Tiiu Paas and Egle Tafenau

University of Tartu, Faculty of Economics and Business Administration

 

 

Abstract

The paper aims to explore international trade flows of the countries that are involved in the EU eastward enlargement process giving emphasis on distinguishing possible regional trade clusters that support integration of the old and new EU members—thus the integration processes within the EU-25. The regional integration effects are handled as the deviations from the trade volume predicted by the baseline gravity equation. The estimation results indicate that from three regions (the Baltic Sea region, Central Europe and Mediterranean area) that consist of both old and new member countries of EU-25, the Baltic Sea region (BSR) can be clearly distinguished. The BSR as a regional economic cluster is playing a significant role in intensification of cross-border interactions and providing new challenges for improving competitiveness of the countries in the northeast part of the enlarged EU.

JEL: F15, R1, C5

Keywords: Regional economic clusters, international trade, competitiveness, Baltic Sea region, Estonia

 

1. INTRODUCTION

Even though ten new countries joined the European Union on 1 May 2004, the enlargement of the European Union has not ended for them – the actual integration and its consequences are yet to come. Besides the heterogeneity of the levels of eco­nomic development and political backgrounds of the new and earlier member states, the fifth enlargement round of the EU is characterised by growing expectations of a properly functioning Single Market, and increasing pressure from globalisation processes and fast technological and knowledge-based de­velopment. This brings in its wake changes in the spatial structure of economic activity, i.e. the regional location of production and resources.

The eastward enlargement (fifth enlargement) of EU poses a major challenge for both the old EU members (EU-15) and new members, the accession countries (AC-10), which have to integrate their national economies with rather different structures. For most of the accession countries (excluding Malta and Cyprus) joining EU means reintegration into Europe. The process of reintegration into the European economic and political system has two interrelated aspects, namely, internal domestic transformation and external relationship with the regional and global economic system. Both these aspects largely determine economic growth and competitiveness of the countries.

The paper focuses on the external aspects of the reintegration process in the context of EU eastward enlargement. The external aspects of reintegration have at least two main factors that bring about a new division of labour in Europe: these are international trade (export and import flows) and foreign direct investments (FDI). These two factors with the related indicators mainly describe the economic openness and level of international integration of the countries. The most expedient economic factor in pushing economies into integration is international trade. International trade flows are often considered to be indicators of links between the economic centers of the regions representing links between the economic and spatial aspects. Therefore, the approach based on implementing the law of gravity for the study of international trade flows and effects of regional integration on trade has been used in the paper.

The paper aims to explore international trade flows of the countries that are involved in the EU eastward enlargement process giving emphasis on distinguishing regional trade clusters that support integration of the old and new EU members—thus the integration processes within the EU-25. The regional integration effects are handled as the deviations from the volume of trade predicted by the baseline gravity model, which expresses the impact of traditional gravitational forces like the size of economy, level of economic development and distance. The main body of the paper falls into two main parts. First part of the paper (Section 2) presents the main empirical results obtained by using the gravity approach for examining the bilateral trade flows of the EU-25 countries. The emphasis is given on exploring possible regional trade clusters that support the East-West trade integration and cross-border interactions of the countries involved in the eastward enlargement processes. Second part (Section 3) considers the Baltic Sea region (BSR) as a European economic area and an integral northeast part of the enlarged EU. The emphasis is also given on the BSR role in trade relations and integration processes of the smallest country of the region – Estonia.

 

2. EXPLORING REGIONAL TRADE CLUSTERS AMONG THE EU-25 COUNTRIES

2.1. Methodology for testing the hypothesis about the existence of regional trade clusters

The previous studies have shown that the gravity equation is a successful model for explaining regional trade patterns, as it incorporates theoretical and empirical advantages related to them (see Baldwin, 1994; Eichengreen and Irvin, 1998; Feenstra, 1998; Estevadeordal, Frantz and Taylor, 2002; Evenett and Keller, 2002). The first gravity models of international trade were developed independently by Jan Tinbergen (1962) and Pentti Pöyhönen (1963). In the basic form of the gravity model, the amount of trade between two countries is assumed to be increasing in their sizes, as measured by their national incomes (or GDP), and decreasing in the cost of transport between them, as measured by the distance between their economic centers. Following the work of Jan Tinbergen (1962), Hans Linnemann (1966) included population as an additional measure of the size of a country and its economy in the gravity equation. This model is sometimes called “the augmented gravity model”. It is also common to specify the augmented gravity model using per capita income (or per capita GDP) instead of the overall national income. Per capita income expresses the level of economic development. The size of the economy and the level of economic development are the main attractive forces or pull factors of bilateral trade flows. The main push factor is the distance between the trading countries, which expresses the impact of transaction costs on the intensity of trade relations. These pull and push factors are the traditional gravitational forces that influence bilateral trade flows.

Including the size of economy in the gravity equation correspondents to the basic new trade theory models in which trade is positively related to the market size. At the same time, the trade theories do not provide a clear explanation for the positive effect of per capita income. According to Alan Deardorff (1998, p. 16), high income countries ordinarily trade disproportionately more with smaller trading partners but not among themselves, while low–income countries trade less. The adding of the per capita income as the indicator of the level of economic development in the gravity equation decreases somewhat the coefficients of the size variables separating at the same time the effects of the size and economic development level effects (de Groot, et al., 2004, p. 110).

Distance as an explanatory variable of bilateral trade flows serves as a proxy for the transportation costs. The inclusion of this variable in the trade model is in accordance with the new economic theory (see Fujita, et al., 1999). Gravity models allow us for testing the impact of various forms of distance. The distances can be measured not only as real geographical distances but also as “virtual distances”, which are exerted by tariff- or non-tariff-trade barriers, different languages, diversities in business cultures, traditions and economic systems. Usually the mentioned barriers are the stronger the larger is the geographical distance between the countries and therefore it is understandable that empirical studies unanimously confirm that distance still matters in trade relations of the countries. Even the rapid decline of information and telecommunication (ITC) costs did not result in the “death of distance” (Ghemawat, 2001; Laaser and Schrader, 2001; Jungmittag and Welfens, 2001).

The gravity equations have been widely used for estimating the impact of a variety of policy issues, including regional trading groups, currency unions, institutions, political blocks, various trade distortions and agreements, border region activities and historical linkages (Soloaga and Winters, 2001; Rose and Wincoop, 2001; de Groot, et al, 2004). Owing to comparative advantages, habits, tastes, infrastructure and technology, regions with common border and/or similar historical background may be natural trade partners. The regional integration effects are ordinarily handled as the deviations from the volume of trade predicted by the baseline gravity model.

As explained above, the main pull factors for developing bilateral trade flows are the size of economy and the level of economic development of the trading partners. In our model specification (see Appendix 1) the size of economy is expressed by the population and the level of economic development by the GDP per capita. The main push factor is the distance between the trading countries. Additionally to traditional push and pull factors also dummy variables are included in the gravity equations, which choice results from the tested hypotheses. In this paper the gravity equations of EU-25 are specified in order to test the existence of the regional trade clusters that consists of both, some EU-15 and AC-10 countries and support the East-West trade integration. The choice of the possible trade clusters is also based on the geographical proximity of the countries.

In order to test the existence of regional trade clusters within the EU-25 countries, we introduce the dummies for three regions.

·        Baltic Sea region — includes Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Poland and Sweden (D_BSR);

·        Central Europe — Austria, the Czech Republic, Germany, Hungary, Poland, the Slovak Republic and Slovenia (D_CE);

·        Mediterranean area — Cyprus, France, Greece, Italy, Malta and Spain (D_MEDIT).

The gravity equations are estimated separately for each year of the period 1993–2002. The year 1993 marks the beginning of achieving stability and clear orientation towards trying to reintegrate into the European economic and political system beginning of the transition processes in the majority of the AC-10 countries. In 1997 the first group of the EU eastward enlargement candidate countries was formed (Luxembourg group of countries, which included Poland, the Czech Republic, Hungary, Estonia, Slovenia, and Cyprus). The second group of the candidate countries was formed in 1999 (the Helsinki group: Latvia, Lithuania, Bulgaria, Romania, Slovakia and Malta). These two groups of countries were the candidate countries (CC-12) of the EU fifth (eastward) enlargement. The years 1997-1999 mark the beginning of the EU eastward enlargement processes. The year 2002 when the decision for the accession countries (AC-10) was done marks the pre-accession period (Bulgaria and Romania were not included in the AC-10).

The specification of the gravity equations estimated in the paper, explanation of the variables and sources of data are presented in Appendix 1.

 

2.2. Empirical results

The estimation results of the gravity equation build for testing the existence of the regional trade clusters among the EU-25 countries based on the data of 2002 are presented in Appendix 2 and the dynamics of the estimation results during the years 1993-2002 in Appendix 3. In order to find whether the inclusion of the regional dummies raises the description level of the model, we carried out the F-test for testing the restriction of the parameters corresponding to the regional dummies being equal to zero. The testing results indicate that the inclusion of the regional dummies improves significantly the descriptive power of the model. The reason for inclusion these dummies in the gravity equation is not only the expectation to increase the explained share of variation in trade flows. We also should take into account that the exclusion of some significant factors that influence bilateral trade flows may cause the omitted variables bias of the estimators.

Based on the estimation results (see Appendices 2 and 3; Figure 1) we can conclude that the Baltic Sea region and the Mediterranean area can be distinguished as the regional trade clusters among the EU-25 countries, with the Baltic Sea region showing higher significance. The bias of the Mediterranean region was 1.5 (exp(0.419)=1.52) and of the Baltic Sea region around 2 (exp(0.716)=2.05) in 2002. Central Europe does not contrast as a trading cluster. All the parameter estimates for the traditional gravitational forces (size of economy, level of economic development and distance) are statistically significant and with the expected signs.

 

 

Figure 1. The trade bias of the Baltic Sea Region, Mediterranean area, Central Europe and the bordering effect.

Notes: The estimates are statistically significant at significance level 0.05 for the Baltic Sea Region and the bordering countries (all the years), for the Mediterranean area in the years 1993 and 2002, and at significance level 0.1 for the Mediterranean area in 2001 and the Central Europe in 1999.

When analysing the dynamics of the parameter estimates of the regional trading clusters (see Figure 1), it can be noticed that the Baltic Sea region achieved highest importance in the mid-1990s while in the case of the Mediterranean area there is some evidence of the existence of this regional trading cluster in the beginning and end of the period 1993-2002. Trade integration of the neighbouring countries has been significant over the whole observation period and the positive bias is increasing again since the EU enlargement processes started.

Thus, the results of empirical analysis of the EU-25 countries’ regional integration allow us to conclude that the Baltic Sea region’s trading cluster is clearly distinguishable. These results are in accordance with the expectations that after the fifth enlargement of the EU, Europe’s economic map is going to change and one potential growth area could be the former Hanseatic League in the northeast part of Europe with its stronghold in the Baltic Sea area (Bröcker and Herrmann, (ed.), 2001; Hospers, 2003; Paas and Tafenau, 2004). The Baltic Sea region has good potential for quick economic development in new Europe. This region is playing an important role in supporting integration processes of the developed and post-socialist economies under common EU umbrella giving also some lessons to other regions of the enlarged Europe. Surely, not only trade, but also investments, location of economic activity and cross-border interactions have become an important factor of regional integration.

 

3. THE BALTIC SEA REGION AS A REGIONAL ECONOMIC CLUSTER

3.1. The Baltic Sea region – an European integral economic area

The Baltic Sea region is a non-homogenous region. When examining the economic situation of the region, the BSR countries are traditionally divided into two groups: 1) the high-income countries Finland, Sweden, Denmark, Norway and Germany, which are the so-called old market economy countries, the developed economies of the region; and 2) the middle- or low-income countries Estonia, Latvia, Lithuania, Poland, and Russia. The latter are classified as the post-socialist or transitional economies.

The division of the BSR countries into the above-mentioned two groups results from their different political conditions for economic and social development. This region has been most significantly affected by the split of post-Second-World-War Europe into two blocs. The BSR countries were divided between two diametrically different economic and political systems — the market-led Western Europe and the command-based socialist or Eastern Europe. The socialist countries of the region were integrated into the Council of Mutual Economic Assistance while the market-oriented countries developed globally oriented integration processes based on the European Community and the European Free Trade Agreement.

After the fall of the Iron Curtain at the end of the 1980s and the beginning of the 1990s the Baltic Sea region started to become an integral part of Europe’s regional development again. Many organizations and institutions have been established and various programmes for co-operation elaborated during the recent decade furthering the Baltic integration and development processes.[1] These institutions establish a solid basis for bottom-up activities creating networks and institutions that support economic development.

The integration of the Baltic Sea region’s countries with the EU has a more than thirty years long history. Germany together with Belgium, France, Italy, Luxembourg and the Netherlands belongs to the group of EU founders (1958). Denmark became the EU member on January 1, 1973. After several years of negotiations and preparations, Sweden and Finland joined the EU on 1 January 1995, which marked the stage of the northern enlargement. In 1995, the Baltic Sea was declared to be the inland sea of the EU. This event is of strategic importance in the Scandinavian countries’ integration with Central and Southern Europe and the Mediterranean. In May 2004, the Baltic States and Poland became the full membership of EU. So after this date eight of ten Baltic Sea region countries belong to the EU, the two non-members being the EU-associated developed country Norway and non-associated post-socialist Russia.

Nowadays, the countries around the Baltic Sea have tight trade relationships (see Figures 2 and 3).

 

 

Figure 2. Share (%) of the BSR in the exports of the countries of the region in 1993-2001.

 

 

Figure 3. Share (%) of the BSR in the imports of countries of the region in 1993-2001.

For the BSR post-socialist countries the main trading partners are the region’s developed countries. Trade with the advanced economies of the BSR has helped the transitional economies to adjust with the standards of market economy, helping to restructure their own economy. The importance of the region in economic development of the region’s post-socialist countries can also be seen from the high share of the Baltic Sea region as the origin of foreign direct investments (e.g. 60% in Latvia, 82% in Estonia in 2000, see also Scannell, et al., 2003). Foreign direct investments bring with them knowledge and new technologies and thus, they have helped to improve the productivity growth in the accession countries.

The advanced economies of the region have learned about the problems and processes taking place in transitional economies. Regional integration, closer co-operation and openness can help countries of the region to attract new technologies and to succeed in a bigger market. There are also other possible economic gains from integration, e.g., benefits from exploitation of economies of scale, possibilities to increase specialization and profits, greater mobility of capital and labour flows, new challenges to improve productivity and economic growth, etc. But these are only opportunities to gain by regional integration, which themselves do not guarantee economic advance. These opportunities should be seized, taking into account the special features and conditions of the countries involved. For instance, integration may benefit rich and poor countries differently. According to Michael Porter, who also supervised the elaboration of the Baltic Rim Regional Agenda – the Baltic competitiveness vision for the future, the differences between the poor and the rich countries in gains from participation in integration processes are the following. The poor countries will have a chance to catch up quickly, to get access to sophisticated consumers and to gain from competitive pressure. The rich countries will profit from access to bigger markets. They will also get an opportunity for efficient specialization, which makes it possible to outsource production in more effective way (Porter, 2001; Porter and Sölvell, 2001). Thus, due to the non-homogeneity of the region, the BSR countries’ challenges and possible gains from integration differ. At the same time, the Baltic Sea region is proving its position as an integrated and competitive part of EU, which support the integration processes being no longer a peripheral zone of Europe.

 

3.2. Regional trade pattern and the challenges for development of regional cooperation of Estonia

The role of BSR has been particularly remarkable in supporting transition and European reintegration processes of the smallest economy of the region – Estonia. The BSR bilateral trade flows and FDI from the countries of the region have dominated in the Estonian external relationships during the recent decade. The most preferred areas for foreign direct investments into Estonia were financial intermediaries (30% of all direct investments), manufacturing (17%), transport, storage and communications (16.5%) and retail trade (15%) (as at 30 June 2004; Estonian Bank, 2004). Around 68% of the Estonian FDI came from two developed neighbour countries Sweden (42%) and Finland (25.6%) having remarkable impact on the Estonian economic development). At the same time, the BSR share was 72.9% in export and 61.0% in import of Estonia. These shares have been rather stable during the period 1993-2003 having however some tendency to decline. In 1993 the respective shares were 77.7% and 58.5% (IMF, 1998 and 2001; Central Statistical Bureau..., 2004). The main explanations to the small decline of the BSR shares are the diminishing role of Russia and some growth of the Estonian trade relations with the EU countries outside the BSR.

Table 1 presents data about the Estonian regional trade pattern during 1997-2003 – the period between the years when Estonia was nominated as the EU candidate country (1997) till the last year (2003) before the accession of EU. Table 1 also illustrates the dynamics of the Estonian trade relations with the closest neighbour (border) countries Latvia, Finland and Russia. These border regions represent different cases of possible cross-border interactions.

Table 1. Regional trade pattern of Estonia in 1997-2003 (%, the shares of export and import)

		Export			Import
	1997	2000	2003	1997	2000	2003
EU	48.6	68.5	68.3	59.2	56.1	53.6
EFTA	3.8	3.2	4.3	2.2	2.0	1.9
OECD	57.8	76.7	79.9	72.9	70.3	69.5
CIS	26.3	9.6	6.0	17.5	17.8	14.7
BSR:	73.2	74.8	72.9	64.9	64.4	61.0
Russia	18.8	6.8	3.3	14.4	14.1	8.6
Latvia	8.6	7.2	7.4	1.7	2.4	7.0
Lithuania	6.1	3.1	3.7	1.5	1.5	3.4
Poland	0.1	0.6	1.1	1.1	1.7	2.8
Finland	15.7	27.0	24.8	23.4	23.8	15.9
Sweden	13.5	17.3	15.2	9.1	8.7	8.8
Denmark	3.2	2.9	3.9	2.6	2.2	2.2
Norway	1.6	2.2	3.6	1.1	1.2	1.0
Germany	5.6	7.7	9.9	10.0	8.8	11.3

Sources: IMF, Direction of Trade Statistics Yearbooks 1998 and 2001; Central Statistical Bureau of Latvia, 1998, 2001 and 2004)

Estonia has two border regions with Russia: the Narva-Ivangorod border region in the northeast and another border region in the southeast part of the country. These border regions have also functions of the external EU border. Due to some political reasons and worsening trade relations between Estonia and Russia, these border regions do not have good potential for quick development of cross-border economic interactions in near future.

In the south part of the Estonia is the Valga-Valka border region between peripheral areas of two new member countries Estonia and Latvia. The peripheral position of this border region may create some barriers to the quick development of the cross-border economic activities. At the same time the growing trade, FDI and labour flows between the neighbour countries under the common EU umbrella support the development of cross-border interactions. The EU membership and availability of additional EU developments funds will serve new challenges business, common training and retraining of labour force and attracting investments and technologies.

The third border region’s case belongs to the capital areas of Estonia and Finland – the Tallinn-Helsinki border region. Presumably, this region has the best potential for development of bilateral cross border cooperation. Additionally to the trade and FDI flows, important factors are the growing international mobility of good and services, labour, knowledge and innovations in the furtherance of cross-border cooperation. Local and regional institutions and governance have a significant role to play in coordinating efforts to enhance business and infrastructure and to promote cross-border initiatives.

Thus, the possibilities of strengthening the cooperation between the Baltic Sea region countries, particularly the border countries, and linking it with the EU regional policy measures can be handled as the additional challenges to promote Estonia’s economic development. Concurrently the changes in the all-European spatial structure of eco­nomic activity, the impacts of globalisation processes, fast technological and knowledge-based development and deepening migration have to be taken into account as the new challenges as well as pressure for quick rising of competitiveness. On the basis of Estonian experience, it can be said that its close cooperation with the countries around the Baltic Sea, both at the governmental level and through several institutions and cooperation networks, has had a positive impact on Estonia’s (as well as the other Baltic States) economic development. At the same time, we should take into consideration that while the EU enlargement opens up new opportunities for cooperation that will accelerate economic development, also competition will intensify and social tensions and problems may accompany.

 

4. CONCLUSION

The empirical results of the study indicate that trade integration of the EU-25 countries can be explained by the traditional gravitational forces, but additionally various other factors, like border region activities, historical linkages and regional cooperation of the neighbouring countries have an impact on bilateral trade flows. In order to test whether there exists the regional trade clusters which support the integration of the old (EU-15) and new (AC-10) EU members the dummies of three possible regions – the Baltic Sea region, Central Europe and Mediterranean area are included in the gravity equations. The possible regions were chosen so that each region includes both some EU-15 members and accession countries taking into account also the geographical proximity of the countries. The testing results show that the inclusion of regional dummies improves significantly the descriptive power of the gravity equation and allows to avoid the possible omitted variables’ bias.

According to the estimation results, the Baltic Sea region is forming a regional trade cluster. The Central European countries have had relatively weak trade relations so far. For the Mediterranean region there is also some evidence of the possible existence of a trade cluster that support recent integration processes. The estimation results also confirm the significance of cross-border cooperation between the EU-25 countries (the bias is around 1.6). As neighbouring countries are natural trading partners, the trade flows between them are larger than those to third countries. Among the regional trade biases, the BSR bias is the biggest. The Baltic Sea region countries’ bilateral trade flows among the countries involved in the EU eastward enlargement are around twice as large as the trade flows outside the region after controlling for the size of economy, the level of economic development, distance and other dummies.

The countries around the Baltic Sea benefit from the integration due to the synergetic effect of non-homogenous entities – the countries on different economic levels and with different political background and historical ties. The integration within the BSR has played a significant role in supporting the adjustment of the post-socialist countries of the region with the requirements of EU enlargement and in establishing the relevant institutional base for joining EU. The developed countries of the region have got the experience of how to penetrate new markets and to develop economic cooperation with Russia and other post-socialist countries and to adjust with the new business cultures. Thus, the Baltic Sea region is providing an interesting case for deeper analysis of transition and integration processes. The Baltic lessons are also valuable for developing EU regional policies and predicting the possible outcomes of globalization.

The BSR as an economic cluster tend to involve close cooperation between businesses, government and academic institutions supporting the innovations and knowledge based development. The cooperation is also deepening in such sectors as banking, ITC, textile, wood, timber and food industries, logistic, tourism etc., which are forming integral economic clusters within the region. These challenges are promising from a perspective to improve competitiveness of the region as a whole and its countries in near future and also in the long run perspective.

 

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Appendix 1. The variables and sources of data used in the estimation of the gravity equations

The basic specification for estimating the international trade flows of the EU member and accession countries (EU-15 and AC-10 or “old” and “new” EU members) is as follows (the baseline gravity equation):

            ,

where

Y_ij — export from country i to country j (or import from country i to country j);

(POP)_i and (POP)_j — populations of the exporting (i) and importing (j) countries, respectively (or home (i) and host (j) countries);

(GDPpc)_i and (GDPpc)_j — gross domestic product per capita of the exporting (i) and importing (j) countries, respectively;

(DIST)_ij — the distance in kilometres between the countries i and j (the flight distance between the capitals of the countries);

— parameters of the model;

u_ij — error term.

 

Yij	export from country i to country j (export and import data of IMF)
	Traditional gravitational forces
POPi	population of the exporting country (World Bank, WRI)
POPj	population of the importing country (World Bank, WRI)
GDP_pci	gross domestic product per capita of the exporting country in the terms of purchasing power parity (World Bank, WRI)
GDP_pcj	gross domestic product per capita of the importing country in the terms of purchasing power parity (World Bank, WRI)
	Dummy variables
DISTij	flight distance between the capitals of the trading partners (How Far is It? www.indo.com/distance)
D_Borderij	= 1, if the trading partners share a dry land border, = 0 otherwise
D_BSRij	= 1, if both of the trading partners are from the Baltic Sea region (Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Poland and Sweden), = 0 otherwise
D_CEij	= 1, if both of the trading partners are Central European countries (Austria, the Czech Republic, Germany, Hungary, Poland, the Slovak Republic and Slovenia), = 0 otherwise
D_MEDITij	= 1, if both of the trading partners are Mediterranean countries (Cyprus, France, Greece, Italy, Malta and Spain), = 0 otherwise

 

Appendix  2. Estimation results of gravity equation with regional dummies for year 2002.

Variable	Coefficient	Robust standard error of the estimate	Coefficient	Robust standard error of the estimate
ln(GDP_pc_hm)	1.686**	0.085	1.608**	0.088
ln(GDP_pc_hs)	1.065**	0.086	0.986**	0.088
ln(POP_hm)	0.988**	0.024	0.987**	0.024
ln(POP_hs)	0.913**	0.027	0.912**	0.027
ln(Distance)	-0.933**	0.068	-1.058**	0.071
D(BSR)	0.716**	0.130
D(MEDIT)	0.419*	0.169
D(CE)	0.074	0.124
D(Border)	0.496**	0.127	0.439**	0.123
Intercept	-31.5**	1.51	-28.9**	1.57
N	598		598
F	437.1**		665.1**
R2	0.899		0.892
Root MSE	0.817		0.841

** significant at 0.01 significance level, * – 0.05.

Dependent variable: ln(import). hm indicates the exporting country and hs the importing country.

Trade flows from Cyprus and Malta to Luxembourg are missing.

Appendix 3. The dynamics of the estimation results of the gravity equation with regional trade clusters.

Dependent variable: ln(import).

Robust standard errors in parenthesis.

** significant at 0.01 significance level, * – 0.05, ’ – 0.1.

All the trade flows associated with Belgium and Luxembourg and some flows associated with Cyprus, the Czech Republic, Denmark, Estonia, Greece, Hungary, Ireland, Latvia, Lithuania, Malta, Poland, Portugal, Slovakia, Slovenia and Sweden are missing.