Implicit Regulatory Barriers in the EU Single Market : New Empirical Evidence from Gravity Models

Gravity models are used to explore the determinants of trade, making use of fixed effect linear estimators and a Poisson estimator (as in Santos Silva and Tenreyro, 2006) with fixed effects. Beyond usual determinants of trade such as GDP, distance, contiguity, free trade areas and language, this analysis mainly focuses on the role of product market regulation stringency and heterogeneity, and on the role of employment protection. The Single Market has a large positive impact on trade. A broad reform package that would align Product Market Regulation (PMR) indicators to the average of the top half of the best performers and would cut regulatory heterogeneity by one fifth could increase trade intensity within the EU by more than 10%. This analysis also makes use of subcomponents of the PMR indicator (by field of regulation) and the OECD Energy, Transport and Communications Regulation (ETCR) indicator (by sector) to focus on elements on the regulatory issues that matter most for trade. In particular, the stringency of airline and telecom regulations has an adverse effect on trade intensity. Empirical findings on the impact of employment protection legislation on trade intensity are somewhat mixed. This Working Paper relates to the 2014 OECD Economic Survey of the European Union (www.oecd.org/eco/surveys/economic-survey-european-union.htm).