Production Networks in Europe: A Natural Experiment of the EU Enlargement to the East

  • Abstract:

    This paper focuses on the 2004 enlargement of the European Union to the East and treats it as a natural experiment to investigate two issues:first, whether there has been a trade creation effect in final and intermediate goods and second, to what extent this effect has been more pronounced for final or for intermediate goods. Using difference-in-difference analysis, we find that the effect of 2004 EU enlargement has been positive for both intermediate and final goods. Indeed, after controlling for the multilateral resistance and bilateral time-invariant factors, we estimate an increase in bilateral trade of 90% for final goods and 40% for intermediates.