An assessment of the Europe agreements’ effects on bilateral trade, GDP, and welfare

The so-called Europe Agreements had been enacted in the 1990s to initiate the integration of goods markets between the 15 EU incumbent economies as of 1995 and 10 potential entrants located in Central and Eastern Europe. This paper evaluates the trade, GDP, and welfare effects of these agreements by means of structural analysis of a bilateral trade flow model. The results support three conclusions. First, the agreements exerted significant positive effects on goods trade between the EU15 incumbents and the CEEC and, at the same time, they induced trade redirection from other countries. Second, EU15 GDP responded by an increase of much less than 1% while that in the 10 CEEC increased by several percent in response to the agreements. Third, the effects on welfare were moderate in the EU15 but amounted to more double-digit percentage changes in the involved CEEC.