Thesis for bachelor’s degree in economics

Influence of EU Free trade agreement

Author: Joakim Eriksson

Supervisor: Magnus Arnek
Examiner: Catia Cialani
Högskolan Dalarna
Subject: Economics
Course code: NA2008 791 88 Falun

Credits: 15 Sweden

Date of examination: 2021-09-23 Tel 023-77 80 00

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Abstract
The paper uses an impact assessment methodology with ex-ante indicator for free trade
agreement to test the trade of the European Union and countries of the Fennoscandian
Peninsula included Iceland. By estimates intraregional trade share, regional trade introversion
index and intraregional trade intensity the objective is to evaluate if their trade have any signs
for being natural or unnatural and if this could be because of the trade agreements. The
foundation in trade theory is that trade should be accomplished by buying (and selling) of the
cheapest producer, being neutral in their selection and choosing careful from price is positive.
When this requirement does not hold trade could be expensive and therefore negative. When
trade is conducted by choice and not by “natural roads” it could be biased, trade should be
founded by comparative advantage to be positive and considered natural. The study shows
that the European Union free trade agreement have a great capital validity and some small
level of bias trade, although this does not mean it is bad, some level of bias trade could be
hard to avoid being a Union. The Nordic countries shows a biased trade, even though being
members of the EU or EES. The conclusion is that it is not possible to determine if the EU
trade agreement is subconsciously developing unnatural trade, but the study shows that some
partners in the union have biased trade. If this is because of the trade agreement is at this level
left unanswered.

Keywords: Trade, region, agreement, intraregional, tariff, indicator, member.

Contents
Abstract ................................................................................................................................................... 2
1. Introduction ......................................................................................................................................... 1
2. Theoretical framework ........................................................................................................................ 3
2.1 FTAs, now and then ...................................................................................................................... 3
2.1.1 History and Theory FTA ........................................................................................................ 3
2.1.2 Natural trading partner hypothesis ......................................................................................... 5
2.2 Tariffs ............................................................................................................................................ 7
2.3 Other Motivations for FTA ......................................................................................................... 12
2.4 Literature review ......................................................................................................................... 14
3. Methodology: Empirical analysis ...................................................................................................... 16
3.1 Origin and explanation ................................................................................................................ 16
3.2 Method Theory ............................................................................................................................ 18
3.3 Indicators ..................................................................................................................................... 20
3.4 Data ............................................................................................................................................. 24
3.5 How calculations were built ........................................................................................................ 25
4. Results ............................................................................................................................................... 27
5. Discussion ......................................................................................................................................... 30
6. Conclusions ....................................................................................................................................... 32
Future studies ........................................................................................................................................ 33
References ............................................................................................................................................. 34
Appendix ............................................................................................................................................... 38
1. Introduction
Is it not common to agree with the statement that free trade agreements (FTA) are only
positive and beneficial for the affected parties? It is possible for an FTA to have both positive
and negative effects. An FTA is an obligation by members to remove tariffs among member
states while maintaining independent tariff on imports from countries that are not members of
the agreement. A customs union goes further by combining tariff regimes. It must be
addressed that in the literature the borderlines between definitions are blurred. Some FTAs
omit agriculture and services but contain investment. Some customs unions have sanctions to
the common external tariff. This could make they seem like FTAs which turn out to have
equal tariffs in certain sectors. This study will focus mainly on FTAs defined in the traditional
way, because of their dominance among bilateral and regional cooperative groupings in the
international trading system. Also, the fundamental assumptions inherent in an FTA also
commonly apply to greater forms of cooperation.

The fact that each member country keeps its own tariff regime with respect to non-
member countries raises three issues. First, an FTA must be built on rules of origin. If there
were no rules of origin, then there would be transhipment, where non-member countries
would export a good to the member of an FTA with the lowest tariff and then reexport the
good to another FTA members’, avoiding higher tariff barriers. The FTA would essentially
develop an informal customs union in which every tariff line would have the lowest tariff
amongst the members’. Second, it is expected that the prices of goods will vary among
member countries, since chooses of different levels of external tariffs, in a custom union this
should be equalised. Third, although each member retains autonomy over its tariffs against
non-member, the autonomy may make each government more vulnerable to special interest
groups at the national level, while in a customs union these parties would have to push at the
regional level to broadcast their interests.

It is the preferential nature of an FTA that mainly worries economists when analysing
its trade effects (Plummer et al., 2010). Commonly, non-discriminatory trade liberalisation
permits countries to export their products if they are the most efficient manufacturers, and to
source their imports from the lowest-cost suppliers. This also happens in the situation of an
FTA in that it allows for a further efficient regional division of labour, but because it creates
preferences for partner country producers, who may not be the most effective, sourcing is not
certainly from the lowest-cost producer. A member could be able to export its goods to

1
another member just because it appreciates tariff preferences under the FTA. This proposes
that the importing partner will be paying additional for its imports.

An assessment of the FTAs true versus anticipated impact is necessary for identifying
whether the FTAs objectives have been met and what adjustments are required (Plummer et
al., 2010). This study will use methods to assess the impact of FTAs. By using trade
indicators evaluating the trade between regions. This study will used two different regions
(considered trade regions), the EU and a trade region formed by the Fennoscandian Peninsula
(Finland, Sweden, Denmark, and Norway) included Iceland.

The purpose of this work is to test at what extent is trade intraregional to discuss if the
trade within the EU and Nordic countries could be natural or unnatural. The natural trading
partner is part of a hypothesis which is interpreted by characteristics of trade
complementarity, geographic proximity, and high initial trade volumes (Khadan, 2013). Two
out of three indicators will test for existing trade interdependence. For every indicator a high
value may perhaps indicate that countries in the FTA have lower trade cost with each other in
relation to trade with countries that have no FTA. Trade costs are interpreted broadly to
include all cost incurred in getting a good to the final user other than the marginal cost. If a
high value is due to lower trading cost, then FTA may be beneficial as it encourages trade
between natural trading partners. Equally if a low ratio is due to high trade cost, then FTA
may be harmful as it promotes unnatural trade.

This paper will start with history about free trade agreements, trade in general and
European Union. Followed by economic theory behind the method and a literature review of a
study crafted for the Committee on International Trade of the European Parliament estimating
economic costs and benefits of numerous free trade agreements that the EU has and will
complete or is contemplating. Next chapter will be about the chosen method starting with
origin, defining the indicators, declare data and last explain the calculations. The result
showed that the trade between the Nordic countries could indicate some natural trading with
its members. The European Union received numbers that showed that the trade agreement is
not natural nor unnatural. However, this study is too simple not out rule the possibility of
biased trade entirely. The paper ends with discussion, conclusion, and a short text about future
studies.

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2. Theoretical framework
2.1 FTAs, now and then
Defining trade agreements from the start could be difficult. International trade has been
around for centuries. Traditionally trade consisted of textile, food, spices, metal, and art.
Simple, good that you could or did not know how produce yourself (Juneja, n.d). It all comes
down to resources and comparative advantages. The famous silk route and amber road are two
examples of good that was popular early to trade. Trade carried on through land and sea, this
made the ports and settlements flourished. Since then, international trade has taken a new
dimension. In early state, around 1600th, the Mercantilism dominated. At the time the main
objective of trade was to obtain a favourable balance of trade. This means that the exports
should exceed the value of imports (Johnston, 2021). Thomas Mun, a director of the British
East India Company, wrote a letter in the 1630s to his son stating that to increase their wealth
and reassure they must engage in foreign trade (Kirst, 2020). Under the rule to sell more to
strangers yearly than we consume of theirs in value. Mercantilists said that governments
should encourage exports and that governments should control economic action and place
restrictions on imports, if required to guarantee an export surplus. Preferably, a nation would
export finished goods and import raw materials (Kirst, 2020). At this time governments used
the tariffs and quotas on imports to assist local industries. Example, the British Navigation
Act of 1651, when foreign ships were not allowed to take part in costal trade in England. The
import hade to be carried by either a British ship or ships that were register in the country
where the goods were produced. Mercantilism where criticised by the economics Adam Smith
and David Ricardo, thanks to their theories that exports were just the necessary cost of
acquiring them and desirability of import the trend towards liberalised trade were born.

2.1.1 History and Theory FTA

In society today where technology and innovation have open border to globalisation, it
is too expansive for a country to be self-sufficient and remain isolated (Juneja, n.d).

According to Juneja (n.d) several factor involving (but not limited) to industrialisation,
development of transportation, globalisation, technology that enables trade and
communication has influenced to adjust in the format of business organisations and trade
traditions. Companies and Organisations are no longer entities with a local identity.
Multinational organisations have developed all over the globe. The earth has become smaller.
The way businesses are conducted have changed. Companies no longer restrict themselves to

3
local markets. They no longer depend upon local resources, trade is no longer between small
producers and farmers but giant global corporations that buy parts and materials from around
the world and sell globally (Kirst, 2020). These enterprises setup production where it is
favourable in terms of cheaper resource accessibility as well as help from local government
and in terms of markets, geographical boundaries do not bother them.

While countries open their economies to global competition, they need to operate wisely
not to trouble their domestic economy and protected industries. This balancing act is often
controlled through individual countries trade and tariff policy, which forms a part of each
country’s foreign trade policy that governs its approach to international trade and commerce
(Juneja, n.d).

After World War II, WTO (World Trade Organization) has been acting a key role in
assisting and attempting to rationalise the global trade and tariff policies with an aim to push
for free trade. In reality free trade could be seen as just a dream, because as long as there is no
equivalence between developed and developing economies (Juneja, n.d). Today most of the
countries are party to several bi-lateral as well as multi-lateral tariff and trade agreements like
GATT (General Agreement on Tariffs and Trade) which they regulate imports and exports to
and from certain countries.

The basic principle pushing international trade is that of comparative advantage (Juneja,
n.d). Some countries are fortunate with some natural resources while others have different
reserves at their disposal. Think about the example of a country like Saudi Arabia. They have
far more oil than they could use. However, there are very limited other resources that can be
used within. It is exports which make it available for Saudi Arabia to lead a booming life.
They export the surplus oil and import all the other goods. Likewise, countries like India and
China which have the greatest working populations export their labour services (Juneja, n.d).
Therefore, it is important for any country to acknowledge their core proficiency and start
concentrating on exporting them.

Economic effect

The purpose of reducing barriers to trade is to increase the level of trade, which is
expected to improve economic well-being (Kirst, 2020). Because of this the development
could be irrational. Economists often evaluate economic well-being with the GDP. However,

4
it has major theoretical difficulties (Kirst, 2020). GDP fails to describe factors that make a
difference in individuals' lives and impact on their utility or preference (security, leisure,
income distribution and clean environment). GDP does not differentiate between “good
growth” and “bad growth”. So, a company dumping by-product of its manufacturing into a
river. Both the manufacturing and the following clean-up contribute to the measurement of
GDP (Kirst, 2020). So even though we see an economic growth, it could be because of
something else.

2.1.2 Natural trading partner hypothesis

The natural trading partner hypothesis and the belief that FTAs between natural trading
partners is further likely to improve their economic welfare were established by Wonnacott
and Lutz (1989). The literature classifies numerous measures for determining a country’s
natural trading partner.

Volume

The belief that a high initial volume of trade between potential members of an FTA will
increase welfare was launched by Lipsey in 1960 (Khadan, 2013). Lipsey stated that “... the
larger are purchases of domestic commodities and the smaller are purchases from the outside
world, the more likely it is that the union will bring gain”. Khadan (2013) claims that if the
likely members of an FTA are originally important trading partners, then the structure of an
FTA among them will be reinforcing natural trading partners, not artificially diverting them.
Strengthening the initial volume of trade principle reasoned that if unions are established
between countries that currently trade disproportionately, the risk of large amounts of trade
diversion is reduced. Khadan (2013) also recommended that if the share of intraregional trade
in total trade is small then this could increase the possibility that trade unions would result in
trade diversion.

Geography

Wonnacott and Lutz (1989) associated geographic proximity as crucial criterion to find
a natural trading partner. Khadan (2013) stated that there is a strong tendency for states in
geographic proximity to trade more with each other since of the benefits from low transport
and communication expenses. Deardorff and Stern (1994) asserted that if countries are located
close to each other, then the structure of an FTA can increase their economic welfare as there

5
are benefits to be derived from lower transaction costs. Khadan (2013) describes that in 1993
Krugman judged economic geography; transportation cost, to show that the accomplishment
of FTAs alters on the geographic proximity of trading partners. The fundamental principle of
Krugman’s idea is that in the case where inter-continental transport cost is zero; the nature of
continental FTAs is likely to decrease economic welfare. On the other hand, when inter-
continental transport cost is infinite, continental FTAs are expected to be welfare improving.

Complementarity

The limitations connected with the natural trading partner hypothesis formulated in
reference to geography and initial volume of trade covered the way for Schiff (2001) to
redefine the natural trading partner hypothesis in terms of trade complementarity. Schiff
(2001) stated that trading partners are natural if their trading structure is characterised by
complementarity.

Schiff (2001) established a theoretical model to determine that an FTA between

countries with strong and improving complementary trade structures is more likely to be
welfare enhancing. In this favour, trade complementarity seems to be a strong measure for
identifying a country’s real natural trade partner. The important aspect of this argument has to
do with the export capacity of the exporting country being large enough to fulfil the import
demand of the importing country competitively. The importing country’s market now
becomes the natural trade market for the exporting country as the exporting country’s trade
can survive in a highly competitive environment in that market. Similarly, the importing
country would be importing from the most efficient supplier hence preventing possible trade
diversion.

The fundamental condition here is for the exporting country to have comparative
advantage in its export trade to the relevant importing country suggesting that the importing
country should have a comparative disadvantage in comparable trade owing to some sub-
optimal production technique regarding the exporting country and the world. This implies
that the natural trading partner hypothesis pairs countries with different comparative
advantage structures. This type of trading atmosphere is largely trade creating and results in
efficiency gains from comparative cost differential which in turn ensures an optimal economic
welfare outcome for the construction of FTAs. Trade complementarity is essential for
specifying a natural trading partner as it enables the economical use of assets which is vital
for small developing countries in a fast-globalising world economy.

6
2.2 Tariffs
Basic trade theory proposes that free trade is the optimal policy for an economy,
compensatory policies can be applied and adverse interactions with market malfunctions. The
only exclusion is that a big country may be able to influence its terms of trade at the cost of its
trade partners applying an “optimal tariff”. The motive offers a justification for countries to
join trade agreements to avoiding communally toxic trade barriers (Rodrik, D., 2018).

Figure 1. Tariffs theory

Economists have long acknowledged that real-world trade agreements are not easy to
appreciate from the lens of “optimal tariff” theory. This theory contends that a country that is
a significant importer of a certain product can shift the economic liability of an import tariff
from domestic shoppers to foreign sellers if the country has monopsony power in the market
the country is a major buyer from (Bowen, 2015). Figure 1 is showing the theory behind trade

7
and tariffs, here the areas are outlined. As trade agreements have developed and gone past
import tariffs and quotas into regulatory rules and harmonization, they have developed harder
and harder to suit into established economic theory.

Tariffs are a tax put by the government on imports. Increase the price for consumers,
lead to a decline in imports, and could also lead to vengeance by other nations. Tariffs are an
essential tool for domestic good. They are enforced to defend domestic industry from cheap
imports.

Retaliation with other countries putting tariffs on their exports is very common. In the
case of figure 2, the tariff is P1-P2. The tariff leads to fall in import, Q4-Q1, after the tariff
imports fall to Q3-Q2. Consumer surplus falls by 1+2+3+4. Government raises tariff revenue
of area 3. Domestic suppliers gain in surplus of area 1. The net welfare loss is (1+2+3+4) –
(1+3) = 2+4

Figure 2. Tariff retaliation

The effect is showed in Figure 3. Without any trade the price for equilibrium would be
1.80 with a 40 quantity. With a tariff of 0.40 the price will be 1.60. The quantity of imports at

8
1.60 is (50-30) = 20. With free trade, the price would be 1.20 with a quantity of 60. With tariff
the government revenue increases with 8 units. The consumer surplus fluctuates between the
price and what the consumers pay and the price they are ready to pay. So, the area of triangle
amongst demand curve and price.

Figure 3. Market effect

When Units
No trade 28
Tariff 40
No tariff 60

Tariffs reduce consumer surplus by 20

9
Table 1. Winner, and losers in high tariffs effects

Higher tariffs effect

Winners Losers
Domestic industries (not in world market) Foreign exporters
Workers in domestic industries Domestic consumers
Government tax revenue Domestic industries, cost on imports
Domestic exporters

One reason for tariffs, it raises revenue. If a country does not create an important good
like oil a tariff will raise money as citizens have no substitute to wage the import tariff. The
environmental factor, a tariff could be placed on goods who may have negative externalities.
The most common tariffs are to make domestic firms more competitive.

Reasons for removing tariffs. Trade liberalisation involves that barriers to trade are
removed. Barriers like traffic on import. If the country would like to join a union, there could
be a no tariffs rules between members states. Lower prices for consumer, increase
specialisation and benefits from economics of rich countries. Theory of comparative
advantage declares net welfare gain from free trade. The reduction of tariffs leads to creation
of more trade.

International agreements in such new fields produce economic concerns that are far
more uncertain than is the case of lessening traditional border barriers. They may well cause
increases in the quantity of trade and cross-border investment. However, their welfare and
efficiency impacts are essentially unclear.

For economists the problem is that different in the case of tariffs and quotas there is no
natural benchmark that permits to determine whether a regulatory standard is unnecessary or
protective. Various national assessments of risk safety, eco-friendly, health and varying
theories of how business ought to connect to its stakeholders, employees, suppliers,
consumers, and local communities will produce different standards. Nothing clearly superior
to others.

For economics the language is that regulatory standards are public goods over which
various nations have separate preferences. An optimal international agreement would trade off

10
the benefits of increasing market integration against the costs of unnecessary harmonization.
But in overall only have a vague idea where that optimal point may lie. In any case will
fluctuate throughout different policy fields.

It is unusual that economists tend to be nearly unanimous in their opinion that trade
agreements are good. Even though not understanding much about the details. They must
consider such agreements regularly strike the right balance in all these areas of ambiguity.

The tendency to relate “free trade agreements” with “free trade” may result from the
circumstance that the new beyond-the border characteristics of these agreements have not yet
made their point on the collective unconsciousness of economists. But Rodrik (2018) believe
it also results from a particular implicit, he describes it as hand-waving type of political
economy analysis. In perception, protectionist interests are the dominant influence in the
determination of trade and other policies. Hence, in the lack of trade agreements, barriers to
trade are too high and there is too little trade. Trade agreements are in turn a process through
which protectionist interests can be defused. The exact details of the agreement do not matter
much if trade-creating interests are encouraged to counterbalance the otherwise major
protectionist impacts, they must move in a desired course because they are a counterweight to
protectionists

This reasoning is valid if the argument’s argument is correct, trade agreements on

balance encourage the special interests more closely will aligned with good economic
performance. But what if they encourage the wrong special interests instead the investors,
banks, and multinational enterprises seeking to increase rents at the expense of the general
interest.

When trade agreements are mainly about tariffs and quotas there is a simple way to tell
the change. The existence of high tariffs before the agreement and tariff decreases because of
the agreement offer prima facie proof that protectionists were the major authority prior to the
agreement and that they were counterbalanced because of the agreement. Although this
perception does not carry over to trade agreements on domestic rules, regulations, and
standards because it is not easily known where the efficient benchmark is. A trade agreement
portrayed by an alternate set of specific interests may make matters harsher just as easily as it
makes them healthier. Such agreement can push away from the efficient effect even if it gets
the excuse of a free trade agreement and increases the quantity of trade and investment.

11
2.3 Other Motivations for FTA
According to the Official Website of the International Trade Administration (n.d) of United
states FTA can help enterprises to enter and participate further effortlessly in the international
open market through diminished trade barriers. They mean FTAs addresses variety of the
foreign government action. For example, lowered tariffs, denser rational property safety,
better exporter input by evolving FTA partners could create standards or ethics problem. The
objective could be to get control of investors, and improved opportunities for foreign
government procurement and service establishments (International Trade Administration,
n.d). Through history, for FTAs there have been several reasons motivating the proposal.
Some have been shaped more by foreign/security policy and others more by commercial
considerations. Two will be discussed here.

Political motivations

Foreign policy and security interests have dominated in the agreements with the
European eastern and southern countries (Woolcock, 2007). One example is that the Europe
agreements agreed from 1990 with the central- east European nations. They were motivated
by to create a secure European economic and political order after the cold war. The Euro-Med
Association Agreements with the European southern nations were likewise influenced by the
aspiration to encourage economic and political strength in the Mediterranean (Woolcock,
2007). By supporting economic development, the Euro-Med check largescale external
immigration from the region and furnish the economic foundation for political steadiness.
Now dealing with the possibility of fundamentalism and uncertainty in the region of political
tensions and war. In the Economic Partner Agreement (EPA) negotiations by EU has been
criticized for putting too much importance on social action and not plenty on development
aims.

Commercial motivations

Woolcock (2007) distinguish three comprehensive commercial motivations for FTAs.

Neutralising possible trade diversion following FTAs amongst third-world countries. Forging
tactical links with countries or regions undergoing fast economic growth. Lastly,
implementation of international trade rules. The FTA between EU and Mexico is a traditional

12
case of neutralising trade diversion (Woolcock, 2007). After the decision of North American
Free Trade Agreement (NAFTA), Trade between EU and Mexico faced a breathtakingly drop.
The FTA between the nation and the union was hence motivated with the desire to neutralise
the trade diversion effecting this decline and was succeeded. As a result, the negotiated with
the purpose of acquiring parallel access with NAFTA to the Mexican market. The
negotiations of the European Union with “Mercado Común del Sur” also known as
“Mercosur” were instigated as a region-to-region agreement in order to encourage EU
relationships with Latin America and sustain the development of regional addition contained
by Mercosur and Chile. Negotiations were introduced with Chile since of their aim of
becoming an associate member of Mercosur. The importance of EU, Mercosur and Chile
agreement had been manipulated by the possibilities of the Free Trade Agreement for the
Americas (FTAA). The FTAA was expected to establish a free trade region from Alaska to
Chile. Apart from a limited sum of countries like Cuba (Woolcock, 2007).

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2.4 Literature review
Although economists generally agree on free trade for the choice of consumers, improvement
of national and growth potential, a wave of to global scale aims to continue progress towards
free trade in the world. In this context, and for the sake of preserving business opportunities
for European companies, the European Union has a notable exception to these protectionist
impulses. Although the Transatlantic Investment Trade Partnership project remains under
respiratory assistance, the EU has opened up by negotiating preferential trade agreements to
trying to enable benefits of free trade continue to benefit citizens and businesses (Hartwell et
al., 2018).

The objective of the study by Hartwell and Movchan (2018) was to provide the
European Parliament, members, and specific the Committee on International Trade with an
estimation of the economic costs and benefits of several free trade agreements that the EU has
completed, will complete, or is anticipating. This analysis was undertaken in the context of
EU for Growth, Jobs and Harnesses Globalization, with the aim of understanding the effects
of these agreements on the EU and partner countries. Several coherent themes emerged from
this broad analysis (Hartwell et al., 2018).

Regarding the agreements already concluded, the on the EU have been mainly as
foreseen in ex ante evaluations and are mostly relatively because they correspond to the
staggering relative size of the EU versus Peru and Korea, or the six Central American nations.
And in almost all the cases the study looks at, actual effects in partner countries have been
more than expected in general equilibrium modelling computable in both a time series short
of data generally less than total liberalisation than that envisaged the models. The study
anticipates that the effects on trade, and poverty are likely to amplify as economies continue
to restructure, but the accumulation of these will take longer than a few years (Hartwell et al.,
2018).

Perhaps more importantly for the agreements already concluded, no example we have
been able to show that the FTA has a manifestly negative effect on the welfare of the
country's EU signatory. The main point to take away from existing agreements is that trade
agreements are very effective for short-term sectoral trade flows, while economic and social
measures may take longer to influence (Hartwell et al., 2018).

In this which concerns the recently concluded agreements, should see small but positive
impacts on the GDP and well-being with a small impetus in the and larger gains in specific

14
sectors. Ex ante estimates predict that the agribusiness sector among the main beneficiaries in
the case of the Canada and Vietnam agreements, while studies the Japanese agreement predict
that manufacturing in will derive great benefit. The most significant negative change in
production to be generated by the FTA with Vietnam, where leather products could negatively
affect EU producers at the lower end of the country. In addition, stricter competition will
likewise be felt from European producers of different transport equipment in the expansion of
Japanese and Canadian exports (Hartwell et al., 2018).

The impact of these recently concluded agreements, however, depends on substantial

reduction of non-tariff barriers in trade in goods and services, because tariff liberalization
alone is not capable of generating economic gains this is a difference which can be attributed
to that the more developed economies are the trading partners by these agreements, rather
than the market economies studied previously. Eventually, even though the three agreements
contain provisions for trade and sustainable development, quantitative assessments of these
provisions are hard to predict (Hartwell et al., 2018).

The last area of analysis concerns the agreements currently negotiated with the EU,
trade agreements focus on ambitious liberalisation of tariffs and measures trade facilitation.
On the contrary, the agreement with Mexico is a modernisation of the existing FTA, and its
agenda is therefore more elaborate. These agreements are expected to result in positive but
low increases in the EU's GDP and welfare. Bilateral trade will increase considerably,
benefiting both partners, that there will probably have neutral or marginal impacts on poverty
reduction (Hartwell et al., 2018).

15
3. Methodology: Empirical analysis
The method uses trade indicator with the goal to evaluate the potential economic effects of a
free trade agreement. Plummer et al., (2010) point out “Impacts on what?” as an important
understanding in selecting a relevant method to estimate the effects of FTAs. Conflict on the
impact of removing or decreasing tariffs and the attractiveness of an FTA occasionally stalks
from the reality that various specialists underline difference consequences of an FTA. A main
fear for customs minister and officials is the impact FTAs can have on revenue from tariff.
The commercial and manufacturing sector is largely concerned in impacts on the degree of
national production, aggregated or disaggregated levels (Plummer et al., 2010). The impact on
trade level is occasionally highlighted by strategy producers and people from the academics
side. This is just one characteristic of a free trade agreements. Although their assessments do
not typically get to the policy-making development entirely consumers benefit of the
friendship by FTAs, the decline in import prices would not be overlooked. Economists
generally put emphasis on the complete welfare and efficiency improvements at the macro
level. To determine the longitude of bias trade the indicator will be estimated, it is essential to
choose the appropriate estimation method built on the initial target of the study and gently
evaluate the benefits and fees of an FTA from several viewpoints applying several methods.

While the method by Plummer et al., (2010) mostly concern with the economic
estimation of advantageous tariff liberalisation Plummer et al. (2010) acknowledge that some
major conclusions of FTAs cannot be entirely apprehended by economic statistics and
models. The authors momentarily hint on these concerns. Advantages that are not entirely
apprehended by economic models such as fundamental transformation and economic solidity.
This are vital for expressive economic development of developing countries.

3.1 Origin and explanation

The increasing tendency of signing FTAs is severe in any area of the earth, but
particularly so in the Asian territory. All FTAs negotiations should require the analysis of the
possible effect of the anticipated agreement. The more FTAs are authorized, the more
important the need to evaluate their actual effect (Plummer et al., 2010). Conducting solid
economic studies of FTA impact assessment is particularly vital for development nations. In
most development countries, experts who are common with econometric theories and models
are limited. Due for to the shortage of technological expertise and assistance, administrators

16
occasionally cannot successfully take significant policy implications from the economic
analyses (Plummer et al., 2010). That’s why in 2010 the People’s Republic of China Regional
Cooperation and Poverty Reduction Fund financed a project to develop an easy method. Yet
still there are several academic textbooks on worldwide trade and economic models. The
number of pleasant publications on methodologies for impact assessment of FTAs that focus
on policy makers is very narrow. The book by Plummer (2010) try to satisfy this disparity. It
intends to serve as a succinct and comprehensive reference for policy makers and researchers
who are interested in the impact evaluation of existing and/or proposed FTAs and the theories
underlying the evaluation methods. This publication project was built based on the genuine
needs of developing country executives (Plummer et al., 2010). This motivates the reason
why this method was chosen. An easy method designed for the novice economist meet the
level of this thesis.

Indicator explained

It is crucial to know the magnitude to which nations in a planned FTA previously trade
with each other prior to the establishment of the FTA. Trade here indicates to the total of
imports and exports. Intraregional trade share and regional trade intensity are the indicators
usually applied as methods of existing trade interdependence. For every indicator, a high
significance may indicate that nations in the planned FTA have poorer trade expenses with
each another comparative to trade with countries with no FTA. Now trade costs are
interpreted generally to contain all costs sustained in delivering a good to the final intended
user other than the marginal cost of producing the good itself. This including transport costs,
policy barriers, information costs, contract enforcement costs, costs associated with the use of
different currencies, legal and regulatory costs, and local distribution costs (Snorrason, 2012).
If the high result is now due to lower trade costs the FTA may be useful as it inspires trade
among natural trading partners. On the Other Hand, if a low ratio is due to higher trade costs,
then an FTA may be harmful as it promotes unnatural trade (Plummer et al., 2010).

Motivation

Plummer (et al., 2010) explains the methods require some trade data that comes at
various level of cluster and are consensual in nature. It is applying trade indicators to illustrate

17
a particular assumption about the possible effect of entering an FTA. The main benefit of the
method is that the data obligations are marginal, and consequently this method is simple to
execute. Nevertheless, the major disadvantage of trade indicators is that they do not offer
accurate figures that tell the results of an FTA on trade, production, consumption, and
welfare.

3.2 Method Theory

Preceding to estimating the ability and real impact of an FTA, discussions would take place
among the government and different stakeholders. It is sensible that the lead agency of FTA
talk, the trade, commerce, or foreign affairs ministry, conduct national discussions with
numerous line ministries as the private sector. To distinguish potential effects of an FTA,
while holding in mind that protectionist interest groups be likely to put tension on the
leadership to prevent signing FTAs and to deliver financial assistance to the concerned
productions once the FTA is in order (Plummer et al., 2010).

The literal measurement of the potential and actual impacts of an FTA is accomplished
primarily using economic data and methods. The consultations and economic analysis are
complementary. In circumstances where response from stakeholders and the results of studies
are not fully steady, it is crucial for policy makers to investigate the specifics and distinguish
the reasons of such variations. While stakeholders are limited by their own profits, analysis
results are also dependent relative on expectations used in the models and the accessibility of
data. Case studies built on formal interviews or inquiry of business surveys could fill such
differences. Studies that intend to distinguish the required policy modifications are organised
or funded by the government and occasionally they are organised by private institutions. It is
essential to perform theoretically informed and politically neutral studies. Very important for
those immediately engaged in the FTA negotiations be supposed to not lead the FTA
valuation studies (Plummer et al., 2010).

It is needed to conduct economic valuation studies of an FTA mutually prior to its

negotiation and after its application. An awareness of the possible effects of an FTA earlier its
negotiation, ex-ante evaluation, is needed in determining the general negotiation status of the
country. Based on general cost–benefit analysis and the discovery of what the country can and
cannot deliver to its FTA partners in the negotiations. Before negotiation, analyses are also
beneficial to utilise the potential exporting benefits of FTAs and to draw up essential

18
adjustment policies for sectors that could be negatively affected by FTAs. The results of pre-
negotiation impact assessment studies ought to be reflected effectively in the FTA
negotiations. As healthy as assessing the real impacts of an FTA after its implementation, ex-
post evaluation and to inspect whether the impacts are within the expected series is also
essential to draw up additional required adjustment policies for the affected sectors and to
adventure the benefits that are yet to fully occur. This sort of impact assessment is primarily
critical when the negative effects of the FTA seem to be superior to the positive effects
(Plummer et al., 2010). For example, a trade indicator is an index, a ratio used to describe and
estimate the state of trade flows and trade patterns of a particular economy (Mikic and Gilbert
2007). These indicators are simply structured with a country’s trade statistics, which are easily
accessible from federal statistical agencies. Present indicators of regional trade
interdependence. Considering the modesty of these indicators, they can be applied at the early
step of any trade policy conclusion assembly procedure, involving the determination on
whether to join an FTA. An essential warning is that these indicators cannot regulate the
reasons of a certain state or tendency in trade flows (Plummer et al., 2010).

A free trade agreement (FTA) is a promise by signatory parties to eliminate tariffs

between member states while maintaining independent tariff regimes on imports from other
countries that are not members of the agreement. A customs union takes things a step further
by bringing together different tariff regimes. A commitment to free movements of not just
goods and services but also factors of production is referred to as a "common market" outside
of a customs union. A unified market with monetary union is also referred to as an economic
union (Plummer et al., 2010).

These are the meanings you will find in dictionaries. The distinctions between
definitions are blurred. Some FTAs, for example, exclude agriculture and/or services while
include investment. Specific customs unions contain so many exceptions to the "single
external tariff" that they resemble free trade agreements with equal rates in some areas. For
the first 30 years of its existence, the European Economic Community was referred to as a
common market rather than a customs union. Given the preponderance of FTAs defined in the
conventional method among bilateral and regional cooperative groupings in the international
trading system, motivated by Plummer et al. (2010) this research will focus primarily on
FTAs defined in the traditional way.

The fact that each member country keeps its own tariff regime in relation to non-
member countries poses three major concerns in an FTA. First and foremost, an FTA must be
19
founded on origin rules. If there were no rules of origin, non-member countries would export
a good to the FTA member with the lowest tariff and then reexport the good to another FTA
members, avoiding higher tariff barriers. The FTA would basically turn into an informal
customs union, in which every tariff line having the lowest tariff amongst the members. As a
result, rules of origin are required for a real FTA, and there may be expenses involved with
developing, administering, and complying with these laws, which could be exploited as a sort
of "hidden protection" and distort investment decisions (Plummer et al., 2010).

Second, because FTA members can choose varying levels of external tariffs, it is
predicted that product prices will vary between member nations in an FTA, whereas they
should be equalised in a customs union.

Third, though each member of an FTA holds independence over its tariff regime against
non-member countries, this independence may make each government more defenceless to
special interest groups at the national level, whereas in a customs union, special interest
groups would have to lobby at the regional level to have their voices heard (Plummer et al.,
2010).

When examining the trade and welfare implications of an FTA, economists are most
concerned about its preferential nature. Non-discriminatory trade liberalisation, in general,
permits countries to export their products if they are the most efficient producers and to
import from the lowest-cost suppliers. This occurs in the context of an FTA because it allows
for a more efficient regional division of labour, but because it establishes preferences for
partner-country producers, who may not be the most efficient, sourcing is not always from the
lowest-cost supplier. Because of the FTA's tariff preferences, a member country may be able
to export its products to another member country. This implies that the importing partner will
pay more for its imports; in other words, the importing partner's terms of trade (the price of
exports divided by the price of imports) would worsen (Plummer et al., 2010).

3.3 Indicators
Intraregional trade share

The intraregional trade share is identified as the ratio of trade between nations in the planned
region over the overall trade of all the countries. The indicator illustrates the virtual
significance of trade contained by the region contrasted to the total trade of all regional

20
participants. Plummer et al. (2010) explains the formula of the intraregional trade share of
region i in mathematical form as

𝑇𝑖𝑖
𝐼𝑛𝑡𝑟𝑎𝑟𝑒𝑔𝑖𝑜𝑛𝑎𝑙 𝑇𝑟𝑎𝑑𝑒 𝑆ℎ𝑎𝑟𝑒𝑖 = (1)
𝑇𝑖

𝑇𝑖𝑖 being exports of region i to region i plus imports of region i from region i
𝑇𝑖 Total exports of region i to the world plus total imports of region i from the world

Exports of region i to region i should be equivalent to the imports of region i from

region i. That is why the numerator of this indicator can basically be twice the exports of
region i to region i, or twice the imports of region i from region i. This indicator is
uncomplicated to calculate and can be used by a separate country or a group of countries to
evaluate the regional direction of trade (Plummer et al., 2010).

Still there are two crucial problems presented by Anderson and Norheim (1993). The
first one being even if there is no regional bias in the trade between participants the
intraregional trade share would tend to be greater solely because there are more participating
countries. To understand why think about what occurs to the intraregional trade share if a
state were basically split into more countries. Therefore, maintaining the regions trade with
outsider’s constant. Intraregional trade would increase because specific former domestic
transactions would now be converted into regional export and import flows. Increasing the
numerator more than the denominator of the intraregional trade share so the indicator would
also increase (Plummer et al., 2010).

Second one being the greater share of the regions total trade out of world trade would be
the more possible it is that regional participants will be trading with each other and the less
expected what they will do with countries not being members. The intraregional trade share
would be greater because the members perform more of the worlds trade irrespective of
trading partner. When creating evaluations of the intraregional trade share over time or across
groups of countries. It is essential to note if involvement of the regional grouping changes and
to relate how a regions total trade grows in relation to the total trade of the world (Plummer et
al., 2010).

21
 Intraregional trade intensity

Intraregional trade intensity is explained as the intraregional trade share divided by the
share of the regions total trade in world trade. The numerator as the intraregional trade share
could be assumed of as the possibility that any $1 value of overall trade of regional
participants is an intraregional transaction. The denominator as the regions total trade share in
world trade could be believed as the possibility that any $1 value of world trade is a
transaction including at least one regional participant. The nearer the numerator and
denominator are in value, the stronger the intraregional trade intensity is to the value 1, the
more neutral the regional members trade is. The region leans to not have any bias regarding
trading among its members or with outsiders. If the indicator is more than 1, the region has a
bias for trading within itself. If the indicator is less than 1, the region has a bias for trading
with outsiders. The intraregional trade intensity will be likely to increase when the share of a
regions trade inside itself increases more rapidly than its share of world trade (Plummer et al.,
2010).

Intraregional trade intensity formula

𝑇
( 𝑖𝑖⁄𝑇 )
𝑖
𝐼𝑛𝑡𝑟𝑎𝑟𝑒𝑔𝑖𝑜𝑛𝑎𝑙 𝑡𝑟𝑎𝑑𝑒 𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦𝑖 𝑇 (2)
( 𝑖⁄𝑇 )
𝑤

𝑇𝑖𝑖 Exports of region i to region i plus imports of region i from region i

𝑇𝑖 Total exports of region i to the world plus total imports of region i from the world
𝑇𝑤 Total world exports plus total world imports, which can be twice the value of
world exports or twice the value of world imports since the value of world exports
should equal world imports

22
 Regional Trade Introversion Index

Given the challenges of the prior two regional trade interdependence indicators Iapadre
(2006) has suggested the regional trade introversion index to determine the relative intensity
of regional trading versus trading with outsiders. This index contains intraregional trade
intensity (HIi) and extra regional trade intensity (HEi), they are functions of the regions share
of outsider’s total trade and not of world trade as in the earlier trade intensity index. The index
range is –1 to 1 and it is independent of the magnitude of the region. The index increases or
falls only if the intensity of intraregional trade matures rapidly more or less than that of extra
regional trade. If the index is equal to zero, the region’s trade is geographically neutral. If it is
more than zero, the region’s trade has an intraregional bias. Last if its less than zero, the
region’s trade has an extra regional bias.

The formula for the regional trade introversion index is

(𝐻𝐼𝑖 −𝐻𝐸𝑖 )
𝑅𝑒𝑔𝑖𝑜𝑛𝑎𝑙 𝑡𝑟𝑎𝑑𝑒 𝑖𝑛𝑡𝑟𝑜𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑖𝑛𝑑𝑒𝑥𝑖 = (𝐻𝐼𝑖 +𝐻𝐸𝑖 )
(3)

𝐻𝐼𝑖 (𝑇𝑖𝑖 ⁄𝑇𝑖 )

(𝑇𝑂𝑖 ⁄𝑇𝑂 )
𝐻𝐸𝑖 (1 − (𝑇𝑖𝑖 ⁄𝑇𝑖 ))
(1 − (𝑇𝑂𝑖 ⁄𝑇𝑂 ))
𝑇𝑖𝑖 exports of region i to region i plus imports of region i from region i
𝑇𝑖 total exports of region i to the world plus total imports of region i from the world
𝑇𝑂𝑖 exports of region i to outsiders plus imports of region i from outsiders
𝑇𝑜 total exports of outsiders plus total imports of outsiders

23
3.4 Data
Plummer et al. (2010) advise the United Nations Commodity Trade Statistics Database also
called The UN Commodity Trade (Comtrade) Statistics Database or UN Comtrade.
Trendeconomy (2021) being part of this website. It covers complete imports and exports
statistics. There are up to 250 economies registered in the database. The listing classifies the
accessibility of data in years, commodity groupings, and commodity level disaggregation. The
value, in US dollars, of trade at the commodity level is offered in total and two, four, and six-
digit levels. The last one being available in terms of both value and volume, kilograms. The
database is constantly revised, while there is no shown date as to when the data are being
renewed. When trade data are obtained from the national agencies on trade statistics of each
country. They will be standardised by the UN Statistics Division and then added to the UN
Comtrade. The database does not include estimates for lacking data. Some limitations of the
database

The values of the reported detailed commodity data do not certainly sum up to the total
trade for a given country dataset.

Even though there are accessible data in latest classifications, HS 2007, not all countries
report in that classification. The database does not assess data for countries that do not report
in latest classifications.

When the database transforms data from a more recent to an older classification, it
might occur that some of the changed commodity codes include more or fewer commodities
than the official commodity heading indicates. The database does not correct for these cases.

Table 2 shows total export and imports of the European Union with the world from
2011 to 2020. The same have been done for the Nordic countries as well.

Table 2. Data: export and import from 2011 to 2020 European Union, billion US dollar ($)
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Export 2,241 2,251 2,326 2,339 1,983 1,930 2,120 2,308 2,279 2,193
Import 2,443 2,354 2,243 2,281 1,918 1,886 2,090 2,340 2,301 1,960

24
3.5 How calculations were built
Nordic region

The total trade of the Nordic region of Finland, Denmark, Iceland, Norway, and Sweden with

the world were recognized by combining the values of their top trading partner which
could diverge from nine to twelve partners. With the planet existing of 195 administrative
areas as countries according to worldometer (n.d), it was not seen as beneficial to collect
information from every nation. Gathering data of the topflight trading countries will give a
good enough representation for where the indications will tend to proceed. This will also
abandon one variable, for example in the case of Taiwan that are seen as a trading region by
World trade organization (2021) and not yet seen as a member state of the United Nations but
China as their representative.

The total world trade is the combined trade of all the biggest trading partners of the
world. Mostly containing nations from America, Asia, and Europe.

Outsiders in this matter was considered member states of the European Union that
would not be expected to be included in the term of the Nordic nations. For clarity, big trading
nations that are a part of the European continent but not the European Union such as Russia,
Switzerland and United Kingdom was not considered an outsider and their imports and
exports was therefore excluded from the calculations. The value of trade between the Nordic

region and outsiders European Union are based on this assumption.

The total trade of outsiders is the value of outsiders import and export with nations
that also have a significant trade with countries of the Nordic region.

25
 European Union

For the European Union, the calculations were made in the same way. Only this time
the European Union was seen as the region of interest.

Total trade within the European Union is built on numbers from Eurostat (2021) and
only contains trade from a member state to another member state. The total export and import

from and to the European Union are the combined value of European union trade reported
by Eurostat (2021) where it was possible to filter all trade that was made with a non-member

state and in that way excluding them from the calculations. Total world export and imports
when treaded European Union as the region is the same as when Nordic region was the region

of interest. Export and imports of the European Union region with outsider is the value of
trade and the Nordic countries is regarded as outsiders. Total export and imports of outsiders

is the value of the Nordic region trade combined with both themselves but also with
members of the European Union region.

26
4. Results
The result did not shift a great deal throughout the accounted years. They had an almost
constant change every year toward the more beneficial levels. The intraregional trade share
shows the importance of the trade within the region. According to the Table 3 the Nordic
region trade are not particular vital. With a value of 0,408 in 2011 and 0,393 in 2020 this
indicator does not tend to change a lot. It cannot be determined if the trade is biased towards
natural or unnatural. So, this level could be the normal level for trade between the Nordic
countries. This indicator shows the relative importance of trade within the region. This result
would argue that the Nordic region conduct an independent trade in whole and are not biased
towards any way.

Intraregional trade intensity of the Nordic region is in high levels. If this indicator is
higher than one it can according to Plummer et al. (2010) be considered biased. Alike the
previous indicator with value of 30,956 in 2011 to 30,658 in 2019 this also did not tend to
change with time. Only 2020 show some distinguish change with a value of 27,348, this could
however be a direct cause from the covid-19 pandemic. This indicator says that the value can
be thought as the probability that any $1 dollar worth of world trade is a transaction involving
at least one regional member. Close to one is consider neutral trade, this result would then
argue towards a biased trade within the Nordic region. In this case, Intraregional trade
intensity > 1, it means that the region is biased towards trading with itself.

Regional trade introversion index shows some sort of steady declining. Decreasing
from 1,340 in 2011 to 0,941 in 2020. Being around positive means, according to Plummers et
al. (2010) method that the Nordic region could be considered intraregional bias. The trade of
the region is not neutral in its current stage. This means that the Nordic region trade within the
region is growing more than the trade with outsiders. Although the value has declined
throughout the decade this could argue towards a reformation in Nordic trade. A previous
traditional trade that only take time to change.

27
Table 3. Trade in the Nordic region
INTRAREGIONAL INTRAREGIONAL REGIONAL TRADE
TRADE TRADE INTROVERSION
SHARE INTENSITY INDEX
2011 0,408 30,956 1,340
2012 0,407 30,918 1,288
2013 0,405 30,881 1,239
2014 0,403 30,843 1,191
2015 0,401 30,806 1,145
2016 0,400 30,769 1,101
2017 0,398 30,732 1,059
2018 0,396 30,695 1,018
2019 0,394 30,658 0,979
2020 0,393 27,348 0,941

The result for the European Union in Table 4, is showing the same attitude as the
Nordic region, the result does not tend to differ. Although, the rate is still greater.
Interregional trade share has a 0,05 change from the during the examined years. It shows that
the EU moves toward a lesser important trade within the Union. As Anderson and Norheim
(1993) explained that this indicator could be higher if there are more members in the region.
With currently 27 members this surpass greatly the Nordic regions five members. It still
shows that their intraregional trade is more important for the EU than for the Nordic region.

The neutral level of intraregional trade intensity being one, not that far from the first
year in 2011s 1,530. The indicator has since declined towards a neutral level in 2020 with
1,394. Still over one so could be considered biased towards favouring trade inside the union
according to the method. However, immensely moving towards the right way.

Notably the intraregional trade introversion index is have increased for the European
Union since 2011, from 0,714 to 0,768 in 2020. This means the Union is trading more within
the region today than what they did ten years ago. With zero as neutral level, this means EUs
trade are intraregional bias. It means that the trade within the region is growing faster than the
trade with countries outside the union.

28
Table 4. Trade in the European Union

INTRAREGIONAL INTRAREGIONAL REGIONAL TRADE

TRADE TRADE INTROVERSION
SHARE INTENSITY INDEX
2011 0,550 1,530 0,714
2012 0,530 1,520 0,720
2013 0,520 1,510 0,726
2014 0,532 1,500 0,732
2015 0,520 1,480 0,738
2016 0,510 1,450 0,744
2017 0,523 1,432 0,750
2018 0,521 1,426 0,756
2019 0,519 1,420 0,762
2020 0,502 1,394 0,768

29
5. Discussion
The European Union and Nordic region are dependent on their regional trading members, not
unusual because they are all neighbours around the borders. Intraregional trade share does still
not determine straight on if a trade is natural or unnatural, it simply shows an indication how
important their trading partners are. The intraregional trade intensity makes the biggest
difference between the two. The distinct drop in the values of 2020 for the Nordic region
could probably be because of the covid-19 pandemic. It is positive to see that even though the
pandemic affects, trade of EU and Nordic counties it did not move to risky levels. Showing
the strength of the Union. The European Union is not far from a neutral level, but again
making it hard to determine if their trade is influenced by the trade agreements. The trade of
the Nordic region showing this high level makes it not difficult to determine. This represent
the probability for every traded $1 that some of the Nordic countries are involved. It shows
that their trade within the region is very active. They are bias toward trading within itself
which could mean that the Nordic region is not following the economic theory of minimising
cost and trade with the cheapest producer. This implies that the citizens of the region could be
paying a higher price for a good. Which would not be helpful for the consumer. With that
said, the value being in the same high value throughout the decade this could indicate for
another conclusion, namely a natural trade. The regional trade introversion index again shows
that the trade in the Nordic region could be considered biased towards trading with itself.
Nevertheless, the EU have during the past ten years been moving closer to a biased level than
it was before and the Nordic region moving towards opposite level becoming less biased
toward trading with itself.

It is much easier to say that the Nordic region are biased with each other than the EU.
Even though the EU also shows some biased indicators it would be foolish to close your eyes
for the fact that they are a trading Union. The European Union are in fact working together to
achieve higher wealth. The Union is big and containing this many countries it would not make
be hard to retain the trade within the region simply because of coincidence.

Denmark was the first to join the EU in 1973, Sweden and Finland joining 22 years later
in 1995 and Norway and Iceland joining EES three years prior in 1992. So, regional trade
introversion index could be the indicator that shows that EU free trade agreements pulls
members towards a neutral unbiased trade. The reason for Nordic countries having a high
biased level could just be because of slow development and it takes time to change society

30
from being used to trade with its neighbours to start trading with countries that they do not
share it borders with.

It is fascinating circumstances that their trade would be biased even though they have at
least 20 years of membership in the EU or EES. The EU FTA got some indicators that could
be questionable about trade being favourable towards members, but with the union being so
big nothing could be considered obvious. It is explicitly that with the whole Nordic region
being part of the EU or EES still their trade shows result of being biased towards trading with
itself. Should the EU have done a more aggressive recruitment of the new members in 1995,
demanding more neutral trade. Unfortunate, this study will note answer that question.

Ass interesting it is, it is also a liability. The fact that all the countries in the Nordic
region is a member of the EU free agreements EU or EES dose not match well with the ex-
ante methods. This could likely impact the result of the study, but this will continue to be
unknown now that it is impossible to conject what trade would look like between the Nordic
countries if they were not members of the EU or EES.

31
6. Conclusions
The study origins in conjectures if the European Union free trade agreements in some
way influences trade towards an unnatural trade. With ex ante indicators the objective was to
test for natural and unnatural trade. With this later discuss if the EU free trade agreement
influence the trade between its members. This was performed with two established trading
regions, one being EU with its 27 members and the other one the Nordic countries (Denmark,
Finland Iceland, Norway, and Sweden).

The study showed that the Nordic countries show a tendency of being biased towards
trading with itself. The intraregional trade share showed the independence between the two
regions is high. No one of the tested have a significant trading partner that they depend on.

The intraregional trade intensity shows the Nordic trade is being biased toward trading
with itself. Because the intraregional trade intensity has had a consistency for ten years this is
determined as natural trade.

Regional trade introversion index shows a result that the Nordic region is biased
towards that the region will favour trading with itself than outsiders. Since the first recordings
in 2011 this value has declined in value, far more than the EU which have stayed on a stable
level. So, the Nordic countries did have a biased unnatural trade, but if it follow current
development, within time this will become unbiased and neutral.

The conclusion is that the EU free trade agreement do perform some influence on
members trade but only in a positive way.

32
Future studies
This study has some major weaknesses the fact that all tested regions is already part of one
modern free trading agreement. The recommendation for future studies is therefore
conducting a study using a Method for Ex-post economic evaluation of free trade agreements.

Free trade agreements preference indicators for examples: Utility rate, Utilization rate,
and Values of free trade agreements preference.

33
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37
Appendix
Appendix A, Export and import with countries and regions of interest 2020
Appendix A1 Trade within the Nordic region, Finland

Finland
Intra-regional trade

Import Export
Sweden 7 440 000 000 In billions of US$ 6 790 000 000 Sweden
Denmark 1 730 000 000 In billions of US$ 1 750 000 000 Norway
Norway 1 600 000 000 In billions of US$ 1 090 000 000 Denmark
Iceland 15 860 000 In millions of US$ 54 090 000 Iceland

10 785 860 000 In US$ 9 684 090 000

(Trendeconomy, 2021), (Trading economics, 2021).

38
Appendix A2 Biggest trading partner not of the Nordic region, Finland.

Biggest Outsiders trade

In billions of US$
Import Export
Germany 10 400 000 000 In billions of US$ 8 880 000 000 Germany
Russia 6 590 000 000 In billions of US$ 5 430 000 000 USA
China 6 110 000 000 In billions of US$ 4 280 000 000 Netherlands
Netherlands 3 100 000 000 In billions of US$ 3 430 000 000 China
USA 2 310 000 000 In billions of US$ 3 380 000 000 Russia
Estonia 2 270 000 000 In billions of US$ 2 470 000 000 UK
France 2 140 000 000 In billions of US$ 2 060 000 000 France
Poland 2 030 000 000 In billions of US$ 1 950 000 000 Estonia
Italy 1 930 000 000 In billions of US$

36 880 000 000 In US$ 31 880 000 000

(Trendeconomy, 2021), (Trading economics, 2021).

39
Appendix A3 Trade within the Nordic region, Denmark.

Denmark
Intra-regional trade

Import Export
Sweden 12 100 000 000 In billions of US$ 9 340 000 000 Sweden
Norway 3 180 000 000 In billions of US$ 6 160 000 000 Norway
Finland 1 900 000 000 In billions of US$ 1 200 000 000 Finland
Iceland 545 000 000 In millions of US$ 123 880 000 Iceland

17 725 000 000 In US$ 16 823 880 000

(Trendeconomy, 2021), (Trading economics, 2021).

40
Appendix A4 Biggest trading partner not of the Nordic region, Denmark.

Biggest Outsiders trade

In billions of US$
Import Export
Germany 21 000 000 000 In billions of US$ 13 540 000 000 Germany
Netherlands 8 180 000 000 In billions of US$ 6 180 000 000 Netherlands
China 7 550 000 000 In billions of US$ 4 970 000 000 UK
Poland 4 400 000 000 In billions of US$ 4 930 000 000 USA
UK 3 450 000 000 In billions of US$ 4 330 000 000 China
Italy 3 260 000 000 In billions of US$ 3 700 000 000 Poland
Belgium 3 180 000 000 In billions of US$ 3 080 000 000 France
France 2 990 000 000 In billions of US$

54 010 000 000 In US$ 40 730 000 000

(Trendeconomy, 2021), (Trading economics, 2021).

41
Appendix A5 Trade within the Nordic region, Iceland.

Iceland
Intra-regional trade

Import Export
Norway 498 000 000 In millions of US$ 191 000 000 Norway
Denmark 406 000 000 In millions of US$ 126 000 000 Denmark
Sweden 269 000 000 In millions of US$ 31 220 000 Sweden
Finland 64 200 000 In millions of US$ 6 170 000 Finland

1 237 200 000 In US$ 354 390 000

(Trendeconomy, 2021), (Trading economics, 2021).

42
Appendix A6 Biggest trading partner not of the Nordic region, Iceland.

Biggest Outsiders trade

Import Export
Germany 509 000 000 In millions of US$ 925 000 000 Netherlands
China 478 000 000 In millions of US$ 786 000 000 Spain
Netherlands 439 000 000 In millions of US$ 504 000 000 UK
USA 381 000 000 In millions of US$ 367 000 000 France
UK 365 000 000 In millions of US$ 346 000 000 USA
Brazil 259 000 000 In millions of US$ 250 000 000 Germany
Italy 181 000 000 In millions of US$ 115 000 000 Poland
In millions of US$ 101 000 000 Portugal

2 612 000 000 In US$ 3 394 000 000

(Trendeconomy, 2021), (Trading economics, 2021).

43
Appendix A7 Trade within the Nordic region, Norway.

Norway
Intra-regional trade

Import Export
Sweden 8 690 000 000 In billions of US$ 8 170 000 000 Sweden
Denmark 4 400 000 000 In billions of US$ 3 470 000 000 Denmark
Finland 1 940 000 000 In billions of US$ 1 470 000 000 Finland
Iceland 223 080 000 In millions of US$ 66 568 000 Iceland

15 253 080 000 In US$ 13 176 568 000

(Trendeconomy, 2021), (Trading economics, 2021).

44
Appendix A8 Biggest trading partner not of the Nordic region, Norway.

Biggest Outsiders trade

In billions of US$
Import Export
China 9 810 000 000 In billions of US$ 14 400 000 000 UK
Germany 9 320 000 000 In billions of US$ 9 630 000 000 Germany
USA 5 510 000 000 In billions of US$ 8 180 000 000 Netherlands
UK 4 420 000 000 In billions of US$ 6 410 000 000 China
Poland 3 020 000 000 In billions of US$ 4 220 000 000 France
Netherlands 2 770 000 000 In billions of US$ 3 320 000 000 USA
France 2 540 000 000 In billions of US$ 3 120 000 000 Belgium
Italy 2 440 000 000 In billions of US$ 2 260 000 000 Poland

39 830 000 000 In US$ 51 540 000 000

(Trendeconomy, 2021), (Trading economics, 2021).

45
Appendix A9 Trade within the Nordic region, Sweden.

Sweden
Intra-regional trade

Import Export
Norway 13 500 000 000 In billions of US$ 16 300 000 000 Norway
Denmark 10 100 000 000 In billions of US$ 11 700 000 000 Denmark
Finland 7 770 000 000 In billions of US$ 10 900 000 000 Finland
Iceland 35 110 000 In millions of US$ 359 309 000 Iceland

31 405 110 000 39 259 309 000

(Trendeconomy, 2021), (Trading economics, 2021).

46
Appendix A10 Biggest trading partner not of the Nordic region, Sweden.

Biggest Outsiders trade

In billions of US$
Import Export
Germany 27 000 000 000 In billions of US$ 16 100 000 000 Germany
Netherlands 14 600 000 000 In billions of US$ 8 480 000 000 China
China 9 270 000 000 In billions of US$ 7 940 000 000 Netherlands
Poland 7 050 000 000 In billions of US$ 6 230 000 000 France
Finland 7 010 000 000 In billions of US$ 5 400 000 000 Belgium
Belgium 6 520 000 000 In billions of US$ 5 170 000 000 Poland
France 5 680 000 000 In billions of US$ 4 090 000 000 Italy
Italy 5 210 000 000 In billions of US$

82 340 000 000 In US$ 53 410 000 000

(Trendeconomy, 2021), (Trading economics, 2021).

47
Appendix A11 World’s biggest trade economy.

World trade
Export Import
EU 5 815 429 000 000 In US$ 5 532 123 000 000 EU
China 2 499 457 000 000 In US$ 2 567 444 000 000 USA
USA 1 643 160 000 000 In US$ 2 078 386 000 000 China
Japan 705 564 000 000 In US$ 720 956 000 000 Japan
Korea rep. 542 232 000 000 In US$ 695 797 000 000 UK
Hong Kong 534 887 000 000 In US$ 577 834 000 000 Hong Kong
UK 469 683 000 000 In US$ 503 342 000 000 Korea Republic
Mexico 460 703 000 000 In US$ 486 058 000 000 India
Canada 446 872 000 000 In US$ 467 342 000 000 Mexico
Russia 419 850 000 000 In US$ 463 662 000 000 Canada

13 537 837 000 000 In US$ 14 092 944 000 000

(Trendeconomy, 2021), (Trading economics, 2021).

48
Appendix A12 Total Trade of EU members

Intra-regional trade between EU members

Import (In US$) Export (In US$)

EU27 2 509 240 582 302,00 2 483 745 981 162,00

(World trade organization, 2021) (Eurostat, 2021)

Appendix B, value of denotations

Appendix B1 Value of the denotations used in functions

For Nordic FTA For EU

155 704 487 000 In US$ 4 992 986 563 464 In US$

396 626 000 000 In US$ 9 949 616 000 000 In US$

27 630 781 000 000 In US$ 27 630 781 000 000 In US$

386 397 000 000 In US$ 277 723 000 000 In US$

20 135 999 000 000 In US$ 552 330 487 000 In US$

49