A Gravity Model of Net Benefits of EU Membership : The Case of Ukraine

This paper develops a methodology for trade policy analysis of costs and benefits of alternative regional integration scenarios. The methodology is based on the disaggregated gravity equation, which is applied to calculate the impact of the EU enlargement on integration strategies of non-member countries. In particular, the paper measures the impact of the 2004 EU enlargement from the standpoint of Ukraine - a country that has been lost in transition. This angle allows estimating the costs of non-integration that occurred due to trade and investment diversion, and forgone opportunity to carry out structural changes in the Ukrainian economy. According to the results, the EU accession would have had a positive effect on total export volumes and would have changed the composition of Ukrainian exports by almost doubling exports of manufactured goods by 2007. The costs of non-integration accumulate towards the end of the investigated period. Projecting the results into the future clearly indicates that the benefits of the EU accession for Ukraine would have been unambiguously positive and would overweight benefits of the CIS integration.