Is EU facing increasing export competition as a result of trade with low income countries?

Abstract: The concern raised in this paper is whether the cone of diversification for EU to its low income trading partners has become more similar over time, as this would imply a risk for a Stolper- Samuelson effect. In order to assess this risk, the methodology in this paper is designed to capture any rising similarities of EU to its trading partners since a Stolper- Samuleson effect infers that the goods in EU and low income countries are close substitutes and that specialization is incomplete. 117 countries have been included in this study and the countries have been grouped into four income classes according to GDP per capita and assessed as groups of income. In addition have the top 10 trading partners been evaluated individually. Three main approaches have been used to capture any increasing similarity by applying the export figures for EU and its trading partners for 2000-2010. Approach 1, gives a measure of the export overlap for the trading partners to EU in order to seize the export similarity as a share of total export. In approach 2, the unit values of each country relative to EU are calculated to get an indication of any within product variation. Approach 3, computes the technology- and sophistication- level of each county’s export bundle in order to get an inference of a change in its comparative advantage. The findings in this research suggest that the EU cone of diversification is highly differentiated from its low income trading partners and that a Stolper- Samuelson effect can be rejected.