Trade Flows Between Trading Blocs:

The Case of the EU's Trade with Asia and NAFTA

Lisbeth Hellvin and Lars Nilsson

Ministry for Foreign Affairs, SE-103 39 Stockholm, Sweden

E-mail: lisbeth.hellvin@finance.ministry.se, Tel. +46 (8) 405 13 48, Fax +46 (8) 24 39 05

E-mail: lars-l.nilsson@foreign.ministry.se, Tel. +46 (8) 405 56 79, Fax +46 (8) 723 11 76

April 2000

Abstract:
This paper examines to what extent there may be a bias in the trade flows between the major
trading blocs: the EU, the NAFTA countries, and Asia (the ASEM members). Actual trade
between the blocs are compared with projected trade based on a gravity model estimation.
The results suggest that both the EU's and NAFTA's level of trade integration with Asia is
above the average level of trade integration among the OECD countries ,which make out our
point of reference. The opposite holds for the level of trade integration between the EU and
NAFTA, however. Further, trade between NAFTA and Asia are more integrated compared to
the EU's trade with Asia, thereby supporting one of the reasons for the creation of the ASEM,
namely that the EU is lagging behind North America on the Asian market. The weak link in
the trading bloc triangle therefore seems to be between the EU and NAFTA rather than
between the EU and Asia.

The opinions expressed in this article are entirely our own and do not necessarily reflect any views of
the Ministry of Finance or the Ministry for Foreign Affairs.

0
 Trade Flows Between Trading Blocs:
The Case of the EU's Trade with Asia and NAFTA

I. Introduction
In March 1996, the political leaders of the 15 European Union (EU) countries and ten
Asian countries met in Thailand at the first Asia-Europe Meeting (ASEM).1 A second
meeting (ASEM 2) was held in London two years later, and the dialogue will continue
in Seoul in the year 2000. The leaders of both the EU and the Asian countries had felt
a need to strengthen the links between Asia and Europe, and the purpose of the
meeting was to discuss what additional efforts were needed in order to obtain closer
economic, political and cultural ties between Europe and Asia. The Italian PM
Lamberto Dini, acting as President of the Council of the European Union, said in his
speech in Bangkok, 2 March 1996: "We trust that the Asia-Europe Meeting may one
day be on par with the tried and tested links established within the Asian Pacific
Economic Cooperation (APEC) as well as the Euro-Atlantic dialogue, thus helping to
complete a triangle each side of which has a balanced and substantial value." It was
emphasised that the growing economic links between the two regions should form the
basis for a strong partnership between Asia and Europe. In order to strengthen the
partnership, it aims to generate greater trade and investment flows between Asia and
Europe by reinforcing economic cooperation.
Initially, the discussion of the weak side of the triangle referred to that between
Europe and Japan. It has more recently also been applied to that between Europe and
Asia as a whole. However, the argument is often used without much thought being
given to precisely what is meant by it. In the following we will focus on the economic
links.
In the early 1990's, the EU countries have begun to pay more attention to Asia.
A new strategy for Asia was launched by the European Commission in 1994, and
separate strategies have been prepared for e.g. China and Japan. Similar documents

1
The ASEM consists of the following countries: Brunei, Indonesia, Malaysia, the Philippines,
Singapore, Thailand and Vietnam (the Association of South East Asian Nations (ASEAN)), and China,

1
exists, or are underway, in Germany, the Netherlands, Sweden, Belgium, and Spain.
The documents have all one feature in common: a strategic shift towards Asia. There
are three dominating poles of the world economy, the EU, Asia and the members of
the North America Free Trade Agreement (NAFTA). Among these three blocs, it has
been argued that the ties between the EU and Asia are weaker compared to the links
between the EU and NAFTA in general, and between NAFTA and Asia in particular.2
The weak link between the EU and Asia may partially be explained by the EU
countries' high degree of orientation towards the single market.3 The pressure of
external competition and the influence of dynamism from other markets are however
necessary in order to strengthen the EU countries' own economies and to ascertain a
strong European competitive edge in Europe as well as in other non-European
markets.
A number of studies focus on various aspects of the possible ongoing break-up
of the world into the three trading blocs.4 Often studies analyse the relative size of the
blocs, such as the share of world trade, and the extent of intra-regional trade measured
as the share of trade conducted with other members of the trading bloc. A common
feature of the studies is that they try to ascertain whether the creation of trading blocs
has led to an intra-regional bias in trade. However, the extent to which the three
trading blocs trade with each other seem to have been overlooked. That is, is there an
extra-regional bias in the trade between the blocs? Does the EU e.g. trade
proportionally more with NAFTA compared to Asia? Thus, is there a basis for the
common concern that the EU countries are lagging behind the NAFTA countries as
far as trade with Asia is concerned?
This paper aims at further examine to what extent there may be a bias in the
trade between the trading blocs, by comparing actual trade between the three trading
blocs with projected trade based on a gravity model estimation. The member countries
of the trading blocs make out a diverse sample of countries. Therefore, we also
examine trade between individual countries of the trading blocs in order to identify
any possible cross-country patterns and common factors affecting the countries' trade.

Japan, South Korea and EU (15). Hereafter, Asia will be used throughout the text for Asian ASEM-
members.
2
See e.g. Anderson and Francois (1998).
3
Ibid.
4
See e.g. Frankel and Wei (1993) and the literature cited therein.

2
 Section II presents the trading blocs in terms of shares of world production and
world trade. Section III reviews methodology and the data. Section IV reports the
empirical results and discusses the findings. Finally, in section V, some concluding
remarks are made and the paper is summarised.

II. The Trading Blocs in the Global Economy

The reorientation of trade policy towards more openness and the rapid economic
growth in Asia have resulted in a new geographical pattern of world production and
trade. An overview of the three regions' weight in the global economy in terms of
gross domestic product (GDP), exports and imports are presented in Table 1.
EU, Asia, and NAFTA dominate the world economy. Approximately 82
percent of the world's total production of goods and services originate from the three
blocs in 1996. Similarly, 73 percent of world exports originate from the three blocs in
1996 compared to 65 percent of exports in 1980. This is mainly due to the relative
increase in the share of Asian production and trade. The combined GDP of Asia
amounts to 24 percent of world total in 1996, compared to only 14 per cent in 1980.
The EU is the largest market with 30 per cent of world production followed by
NAFTA with 28 per cent.
The EU dominates world trade. Some 39 per cent of world exports originates
from the EU countries. After two decades with double digit growth rates, Asian
countries now accounts for almost 18 per cent of world exports. This is to be
compared with their negligible share of world exports some decades ago. Asia has
become a larger exporter than NAFTA, despite its smaller share of world production.
It has to be pointed out, however, that the countries in Asia are very heterogeneous in
several respects, e.g. in income levels, market size and openness. Japan dominates in
Asia, accounting for 18 per cent of world GDP, and 8.9 per cent of world exports in
1995.

3
Table 1. The Trading Blocs' Weights in the World Economy and World Trade
Region Percent of Percent of Percent of
World GDP World Exports World Imports
1980 1996 1980 1996 1980 1996
EU-15 24.0 29.9 39.2 38.9 40.4 37.2
a
ASIA 14.4 23.6 11.2 17.6 11.7 18.2
NAFTA 27.8 27.7 14.4 16.2 15.1 17.9
Note: a) ASEM-Asia, i.e. Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand and
Vietnam, and China, Japan and South Korea.
Source: World Bank (1998).

Table 2 shows the geographical distribution of trade between the EU, Asia and
NAFTA in 1996. The EU's trade is inward-oriented and dominated by intra-EU trade
flows. Intra-EU trade makes up almost two third of total EU exports. Only 6.5 percent
of the EU's exports are destined for Asia. Asia has however emerged as an
increasingly important export market over time. EU exports to the NAFTA countries
are somewhat larger than corresponding exports to Asia. It is worth noting that the
shares of EU exports to Asia and NAFTA are considerably lower than Asia's and
NAFTA's share of world production (see Table 1).5
NAFTA's exports to Asia are larger than their exports to EU in 1996. The
proportion of NAFTA exports to Asia amounts to approximately 18 per cent, while 14
percent of NAFTA exports are destined for the EU. Less than half of the NAFTA
exports is intra-NAFTA trade. Asia has a similar geographical pattern of exports.
About 35 per cent of Asia's exports is intra-Asian trade and 15 per cent of Asia's
exports are bound for the EU. However, despite the fact that the EU is a larger region
than NAFTA in terms of production and trade, Asia's exports to NAFTA is
considerably higher than their exports to the EU.
On the import side, the trend is even more striking. In EU imports, Asia and
NAFTA are of equal importance. NAFTA's imports from Asia, however, are almost
twice as large as their imports from the EU. NAFTA is also a larger source of imports
for Asia than the EU is.
The figures indicate that the level of NAFTA-EU trade is below the level of
NAFTA-Asia trade. Moreover, the fact that the proportion of the EUs exports to Asia

5
If intra-EU trade is excluded, the figures on EU exports to Asia and North America, respectively,
increase to some 20 per cent each.

4
is considerably lower than Asias share of world production suggests that there is
room for an expansion of trade between Asia and the EU. This will be further
examined in section III.

Table 2. The Geographical Pattern of Trade, 1996 (percent)

Exporting/Importing Partner country Exports - 1996 Imports - 1996
country
EU-15 EU-15 61.2 60.5
Asiaa 6.5 8.9
NAFTA 8.1 8.7

NAFTA EU-15 14.0 15.9

Asiaa 18.0 27.7
NAFTA 47.5 39.0

Asiaa EU-15 14.2 14.5

Asiaa 35.6 38.2
NAFTA 23.3 20.2
Note: a) ASEM-Asia, i.e. Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand and
Vietnam, and China, Japan and South Korea.
Source: Own calculations

III. Methodology and Data

A number of studies have analysed the potential volume of trade between countries
and groups of countries. Several of these studies have focused on the trade of the
newly liberalised countries of Central and Eastern Europe with Western Europe and
the European Union.6 Another branch of studies have concentrated on the trade effects
of regional trading blocs on trade among the members of the blocs.7 To our
knowledge, however, few studies have addressed the question of the potential level of
trade between the major trading blocs; the EU, Asia and NAFTA.
A majority of the studies mentioned above have used a version of the gravity
model as the analytic tool in order to estimate the potential level of trade between
countries or group of countries. Several authors have contributed to improvements of
the theoretical foundations of the gravity model over the last decade.8 As a
consequence, the theoretical underpinnings of the gravity model have become
increasingly understood and accepted and the use of the model has experienced a

6
See e.g. Wang and Winters (1991), Hamilton and Winters (1992) and Baldwin (1994).
7
See footnote 4.

5
revival.9 The basic idea of the gravity model is that bilateral trade flows (Xij) are
determined by three sets of variables: (i) variables indicating total potential demand of
the importing country i, (ii) variables indicating total potential supply of the exporting
country j, and (iii) variables aiding or hindering trade between importing and
exporting countries.
The gravity model bears a close resemblance to the trade models generated by
Helpman and Krugman (1985) in which inter- and intra trade volumes are determined
by income levels. Deardorff (1995), recently showed that the gravity model is
compatible with the traditional Ricardian or Heckscher-Ohlin models of trade as well.
The close ties between the gravity model and the modern trade theory justifies the
application of the gravity model to studies of bilateral trade flows. The gravity model
to be used in this study takes the following form:

X = + GNP + ( GNP / POP ) + GNP + ( GNP / POP ) + DIST

ij 1 i 2 i i 3 j 4 j j 5 ij
(1)
+ EEA + BORDER + LANG + NAFTA + AUNZ + TURK +
6 7 8 9 10 11 ij

Xij = dollar value (1000 dollars) of the exports from country i to country j, = a constant, GNPi,
GNPj = the gross national products of exporting country i, and of importing country j in dollars,

GNPi/POPi and GNPj/POPj = per capita income of country i, and j in dollars, respectively, DISTij =

the geographical distance, in kilometers, between the capitals of the importing and exporting countries,
EEA = a binary variable for trade between the countries within the European Economic Area (EEA),
BORDER = a binary variable for trading countries that have a common border, LANG = a binary
variable for trade between countries with a common or similar language, NAFTA = a binary variable
for trade between the countries of the NAFTA, AUNZ = a binary variable for the free trade agreement
between Australia and New Zealand, TURK = a binary variable for the EU' customs union with Turkey,
eij = a log normally distributed error term and the s are parameters. All variables are in logs, and the
dollar values are in constant 1990 prices.

The model may be interpreted as providing a long run equilibrium view of

trade patterns. Hence, prices are excluded from the model due to its long-run nature,

8
See e.g. Bergstrand (1985 and 1989), Helpman and Krugman (1985), and Deardorff (1995).
9
See e.g. Wang and Winters (1991), Hamilton and Winters (1992) and Baldwin (1994). See
Oguledo and MacPhee (1994) for a survey on the empirical use of the gravity model.

6
since in a general equilibrium setting prices are endogenous and simply balance to
equate supply and demand.10
The variables GNPj and GNPj/POPj capture the import demand of the

importing country. GNPj reflects economic size and is expected to be positive. A

higher per capita income indicates a higher import demand. The population
component of per capita income may however affect trade in two ways. A large
population indicates a large domestic market, a higher degree of self-sufficiency and
less need to trade. A large population also promotes division of labor and implies the
presence of economies of scale in production and therefore opportunities and desire to
trade with a greater variety of goods. Thus, the effects of per capita income on imports
is unclear. The variables GNPi and GNPi/POPi capture potential export supply of the

developing countries in the sample, using the same arguments applied to import
demand. The variables GNPi and GNPj are expected to influence Xij positively while

the two per capita income variables have an indeterminate impact on Xij. The variable

for geographic distance, DISTij, is a measure of transport and transaction costs.

Transport costs are related to distance while transaction costs reflect the fact that
people are better informed about products in adjacent countries. The variable DISTij

is expected to influence trade flows negatively.

The dummy variables, EEA, NAFTA, AUNZ and TURK denote the major free
trade arrangements that apply to the countries in the sample. The variable BORDER
indicates that countries sharing a border are likely to trade with each other relatively
more. The same applies for countries with a common or similar language, indicated by
the variable LANG.

10
See Leamer and Stern (1970), pp.146-147.

7
Table 3. Expected Signs of the Variables in the Gravity Model
Variable Sign Reason
National income of country j (GNPj) + Economically larger countries import more.

Per capita income of EU country j
(GNPj/POPj)
National income of country i (GNPi)
Per capita income of country i
(GNPi/POPi)
Distance (DISTij)
+/- A higher per capita income indicates a higher
import demand, but a larger population may both
increase and decrease trade.
+ Potential export supply, number of varieties
available.
+/- A higher output per person indicates a potential
for higher exports, but a larger population may
both increase and decrease trade.
- Transportation costs and economic proximity

Free trade arrangements, EEA, NAFTA,
AUNZ and TURK.
Countries sharing a border, BORDER.
Countries with a common or similar
language, LANG.
+ Free trade arrengements are supposed to increase
trade
+ Neighbouring countries tend to trade more with
each other
+ Countries with a common or similar language are likely
to trade more with each other

IV. Results and Discussion

The estimation of the model in (1) gives parameter values of the determinants of trade
between the countries in the sample. These coefficients can be used to analyse to what
extent trade between the trading blocs, and between individual countries of the trading
blocs, differ from the average level of trade between the included countries,
accounting for the gravity and the dummy variables. The OECD countries are chosen
as a reference group since it is a well defined group of market economies including
countries at different levels of development from each of the trading blocs that we are
interested in.11
We use data from 1995 and 1996 which is as recent as possible. In order to
avoid any cyclical effects and to reduce the effects of possible temporary shocks,
equation (1) is estimated on an average of 1995 and 1996.12 The trade data (total
bilateral trade) is obtained from the UN's COMTRADE data base, data on the income
variables is obtained from the World Banks (1998) World Development Indicators,

11
Trade between the 28 OECD countries yields 28*27=756 observations. No trade between Iceland
and Mexico is reported. The number of observations thus equals 754.
12
Using averages reduces the effects of temporary shocks. Bayoumi and Eichengreen (1995) use
the same procedure.

8
and distances have been computed as straight lines between capitals. The data have
been converted to constant U.S. dollars.13

Results
The ordinary least squares regression results are presented in Table 4. The results are
by and large those expected. The explanatory power of the model is good, the
included variables explain some 86 percent of the variation of OECD trade. The
coefficient of the exporting countries gross national product, GNPi, has the expected
sign and is significant at the 1 percent level. The same holds for the coefficient of
national income of the importing countries, GNPj. The parameter estimates of per
capita income of the exporting and importing countries are significant at the 1 percent
level. The magnitude of the parameter of per capita income is however greater for the
exporting countries. If the model is re-parameterized using population and per capita
income instead, both parameter estimates are greater in magnitude than those obtained
by e.g. Baldwin (1994). The distance between the trading countries seems to be a
strong impediment to trade. The coefficient of DISTij is negatively significant at the 1
percent level.
Turning to the dummy variables, we see that both a common border and a
common or similar language seem to have a positive impact on the level of trade.
Both variables are positive and statistically significant at the 1 percent level.
Furthermore, free trade areas seem to be of importance to the level of trade in most
cases. The EEA dummy, the dummy for the free trade agreement between Australia
and New Zealand and the dummy for the EU's customs union with Turkey are positive
and significant, at least at the 5 percent level. The dummy variable for trade among
the NAFTA countries is however insignificant.

13
The data are converted to constant 1990 prices by using the overall U.S. GDP deflator obtained
from OECD (1998).

9
Table 4: Gravity Model Regression Results of OECD Trade, (Avg. 1995/96)
Independent variable Coefficient t-statistic
GNPi (Exporting countries) 0.83 (30.58)
GNPi/POPi (Exporting countries) 1.27 (15.15)
GNPj (Importing countries) 0.89 (35.71)
GNPj/POPj (Importing countries) 0.67 (7.76)
Distance -0.87 (22.86)
Binary variables
EEA 0.32 (4.29)
Border 0.33 (2.95)
Lang 0.41 (4.00)
NAFTA 0.38 (1.07)
AUNZ 2.11 (16.44)
Turk 0.26 (2.22)
Constant -43.61 (32.19)

Adj. R2 0.86
No. Obs. 754
Note: All variables are in logs. The log value of the binary variables take on the values 1
and 0, respectively. t-statistics in parentheses are estimated with heteroscedasticity
consistent standard errors.

The degree of trade integration between the EU, Asia and the NAFTA
countries can be obtained by comparing the actual level of trade among them with
projected trade flows based on the parameters from the gravity model estimated on
trade between the OECD countries. A ratio of actual to projected trade close to one
indicates that the trading blocs (countries) are as closely integrated with each other as
are the OECD countries on average. A ratio greater than (below) one, on the other
hand, indicates that the trading blocs (countries) are more (less) integrated than are the
OECD countries on average.
How high is is the level of trade integration between the three blocs compared
to the average level of trade integration among the OECD countries? Is there to some
extent any extra-regional bias in the trade between the three big blocs? That is, has the
level of trade integration between the EU countries and Asia reached the same level as
between the EU and the NAFTA countries? Are there any particular individual
countries that contribute to the results?

10
 Table 5 presents the ratios of actual to projected trade (ratio of trade
integration) between Asia, EU and the NAFTA countries. Three general conclusions
concerning trade among the three blocs can be drawn. First, trade between the EU and
Asia, as well as trade between NAFTA and Asia, is well above the OECD average
level of trade integration. Second, the results indicate that the weakest link in trade
among the three blocs is between the EU and NAFTA. According to the results, the
EU and NAFTA are less integrated as far as trade is concerned than the OECD
countries on average. The ratio of actual to projected trade is less than unity with
respect both to the EU's exports to NAFTA and to NAFTA's exports to the EU,
suggesting a great potential for increasing transatlantic trade. Finally, even though the
level of trade integration between the EU and Asia is higher than the OECD average,
the EU and Asia are less integrated than Asia and NAFTA.

Table 5: Ratio of Trade Integration between the EU, Asia and NAFTA
Exporting Bloc Importing Bloc Ratio of Trade Integration
EU NAFTA 0.80
EU Asia 1.75
Asia EU 2.49
Asia NAFTA 4.48
NAFTA EU 0.63
NAFTA Asia 2.21
Note: Results based on relative distances in parentheses.
Source: Own calculations.

Results for Individual EU Countries

Above, we have seen that the level of trade integration vary between the trading blocs.
Now, the question is whether any one EU country, or EU countries, contribute to this
result to a relatively greater extent than the others.
Table 6 present the ratios of trade integration for the individual EU countries.
As can be seen, the results differ widely across the countries. Ratios of actual to
projected exports to Asia are less than unity for Austria, Greece, Portugal and Spain.
These EU countries display the lowest export integration ratios with Asia among the
EU countries. On the other hand, Finland, Germany, Ireland and Sweden are most
integrated with Asia as far as exports is concerned. Note that the same pattern, by and
large, holds true for the EU countries' exports to the NAFTA countries. Austria and

11
the Southern EU members, except Italy, display the lowest ratios of actual to projected
exports to NAFTA. Germany, Ireland and the Nordic EU members display the highest
ratios.
The results for imports suggest that Austria is the only EU country whose level
of trade integration with Asia is below the average level of trade integration among
the OECD countries. Thus, the pattern identified above with respect to EU exports to
Asia does not seem to be present in the EU countries' imports from Asia. The highest
ratios of actual to potential imports are found for the Netherlands, Ireland, Belgium
and the UK.14 The ratios of the EU countries' actual to potential imports from the
NAFTA countries are below unity except for Belgium, Ireland, and the Netherlands.
The southern EU members show some of the lowest levels of import integration ratios
with the NAFTA countries.

Table 6: Ratios of the EU's Trade Integration

EU Exports to EU Imports from
EU Countries Asia NAFTA Asia NAFTA
Austria 0.81 0.38 0.94 0.42
Belgium 1.80 0.86 3.91 1.73
Denmark 1.55 0.45 1.51 0.42
Finland 2.44 1.24 1.85 0.74
France 1.40 0.58 1.38 0.43
Germany 2.47 1.19 2.89 0.60
Greece 0.26 0.23 1.72 0.50
Ireland 4.03 1.40 8.13 1.13
Italy 1.43 0.81 1.01 0.37
Netherlands 1.52 0.62 8.04 1.68
Portugal 0.46 0.38 1.81 0.27
Spain 0.99 0.41 1.63 0.44
Sweden 2.93 1.64 1.60 0.70
UK 1.72 0.75 3.36 0.62
EU (15) 1.75 0.80 2.49 0.63
Source: Own calculations

Discussion
During the past decades, Asia has been more important as a market for the United
States than for the EU countries. Even though the EU countries have started to pay
more attention to the Asian market, they seem to have failed to catch up with NAFTA
in the level of trade with Asia. What may be the reason(s) behind the EU's relatively
weaker trading position on the Asian market compared to that of North America?

14
Rotterdam is the largest port on the European continent and an important transhipment hub.

12
 Since the 1980s, Western Europe has focused on the completion of the single
market, and with the fall of the Berlin Wall much effort has been directed towards the
countries of Central and Eastern Europe and the forthcoming enlargement. Almost
half of total EU trade is intra-regional trade, and the EU's potential preference for the
European market is reinforced by regional integration and trade agreements. North
America has an advantage over the EU on the Asian market via its presence, influence
and security interest in the region ever since the end of the second world war, thereby
creating a relatively strong base also for closer economic integration.
Traditionally, European companies have preferred to export goods to, instead
of investing in Asia.15 The close interrerlation between trade and foreign direct
investment (FDI) may contribute to explain the EU's lower level of trade integration
with Asia. Compared to North America, the EU has invested only a small proportion
of their total FDI in Asia,16 and lately, investors have been relatively more keen to
invest in the Union and in the transition economies of Central and Eastern Europe.
The limited interest in Asia is due to several factors.17 The EU's regional and
structural policies have attracted FDI to the countries on the periphery of the Union.
This applies in particular to Ireland, but also to Spain and Portugal. A deepening of
integration within the EU, and the forthcoming enlargement towards Central and
Eastern Europe have offered alternatives with lesser risks. Investors outside the EU
generally follow traditional customs and opt for hosts on domestic markets with great
absorptive capacity. EU investors, on the other hand, tend to prefer equity-type
arrangements and majority ownership while Asians often prefer non-equity
arrangements and minority participation in foreign companies in joint ventures.18
Several Asian economies are currently affected by financial and currency
crises. Growth rates are decreasing, and the prospects for increasing trade in the short
run are limited. It is far from clear how long the crisis will last and what will come out
of it. Some argue that the reforms and liberalisations following the rescue packages
from e.g. the IMF will shape the economies and make them more open and stronger in
the long run, and thereby also (even) more interesting as markets for European
companies. In the short and middle run, however, the economic slowdown in Asia

15
Langhammer (1998), p. 237.
16
See e.g. UNCTAD (1996) and Anderson and Francois (1998).
17
See Langhammer (1998), pp. 237-38.

13
may lead to an increase in the relative importance of North America as a market for
EU exports. Furthermore, if the ideas behind the Trans-Atlantic Free Trade Area
(TAFTA) will be implemented, trade between Europe and North America may
increase significantly in the future.
Still, even though the gravity model has been fruitful in explaining trade flows
between countries, the attempts to estimate the level of trade integration should be
interpreted with some caution since the projected levels of trade are sensitive to
valuation errors of the estimated coefficients.19 However, any possible valuation error
affects the level of trade integration of the three blocs to the same extent, why the
comparison of the trading blocs' relative degree of trade integration with each other
remain the same.

V. Summary
This paper analyses the level of trade integration between the three trading blocs the
EU, Asia and NAFTA. The results suggest that both the EU's and NAFTA's level of
trade integration with Asia is above the average level of trade integration among the
OECD countries. We also found NAFTA's trade with Asia to be more integrated
compared to the EU's trade with Asia, thereby supporting one of the reasons for the
creation of the ASEM, namely that the EU is lagging behind North America on the
Asian market. However, the results indicate that the level of trade integration between
the EU and NAFTA is below the average level of trade integration among the OECD
countries. The weak link in the trading bloc triangle therefore seems to be between the
EU and NAFTA rather than between the EU and Asia.

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Langhammer (1998).
19
Gros and Gonciarz (1996), p. 714.

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Appendix

Table A1: Gravity Model Regression Results of OECD Trade using Relative
Distances, (Avg. 1995/96)
Independent variable Coefficient t-statistic
GNPi (Exporting countries) 0.54 (10.14)
GNPi/POPi (Exporting countries) 1.18 (12.98)
GNPj (Importing countries) 0.87 (36.00)
GNPj/POPj (Importing countries) 0.72 (8.60)
Distance -0.83 (22.01)
Binary variables
EEA 0.25 (3.37)
BORDER 0.37 (3.36)
LANG 0.35 (3.49)
NAFTA 0.53 (1.52)
AUNZ 2.18 (14.41)
TURK 0.31 (2.55)
Weight 0.29 (4.78)
Constant -34.43 (15.49)
Adj. R2 0.86
No. Obs. 754

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