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Abstract

This paper examines the impact of the 4th and 5th extensions in European Union (EU) on the trade flows of member and non-member countries. Specifically, the paper tests whether the 4th and 5th extensions in the EU cause trade diversion or trade creation. Moreover, the paper examines whether the trade creation and trade diversion effects of these extensions are similar across the extensions and across the new members joining in these two extensions. Applying the correctly-specified fixed effect gravity model on the data of imports and exports of the EU countries for the period 1988-2008, we found that, in most of commodity groups, the EU boosts trade among member countries at the cost of lowering the trade with non-member countries. However, the increase in trade with member countries is higher than the decrease in the trade with non-member countries. Moreover, we found that trade creation and trade diversion effects vary across the extensions in the EU, across the commodity groups and across the members joining the EU in 4th and 5th extensions.
JEL Classification: F1, F5, F6, F15..