The Dynamics of Trade Affinities : An Assessment of the Globalization of the European Continent

Abstract: This thesis is an assessment of the dynamics of trade affinities and how they have influenced trade flows in the European continent. The focus is how trade affinities have altered over a time span of four time periods stretching from the 1970s up to today and how these alterations have influenced globalization. A total of 41 countries belonging to the European continent have been selected. Furthermore four variables were selected to represent trade affinities; distance, border, colony, and language. These have been selected as they are generally believed to be static and thus should not change over time. Also, this thesis aims to show the separate influence of each trade affinity as other papers usually estimate trade affinities as one collective variable. By the use of a gravity model 9 variables are tested in order to determine their influence on trade flows. This is done through a regression with a log-log equation where the dependent variable is Export and the affinity variables are estimated as dummy variables. The regression is divided into four time periods in order to more easily determine how the trade affinity variables have altered in influence on trade flows in Europe. The first time period represent an average of the time period 1974-1976, the second 1984-1986, the third 1994-1996 and the fourth 2004-2006. The regression results illustrate that the majority of the selected variables are significant but most importantly that the trade affinity variables are proven to have altered over the time periods. The performance of a Wald estimation gives an indication that trade affinities are in fact dynamic although the results are not entirely significant for all variables. Based on the results, it is apparent that trade affinities still have a significant effect on trade flows in the European continent. Although, their effects have altered to become less significant in some cases while others have become stronger they all jointly share the attributes of affecting trade. These alterations can in turn be interpreted as dependent on the globalization process of the European continent. As globalization has progressed some affinities have decreased in influence while others have regained new importance.