28 January 1999 • The Potential for Trade between Austria and Five CEE Countries • Peter Egger

This article attempts to assess the potential for foreign trade in five of the ten Central and Eastern European countries (CEECs) using a foreign trade model. The main exogenous variables in this model are the size of the countries (as captured by the sum of the GDP of a pair of trading partners as well as by the GDP ratio), each country's factor endowment (population, capital), a geographic variable (the distance between the economic centres of two trading partners as an approximation for transportation costs in foreign trade), and various other variables that reflect trade preferences between countries (e.g., common language and common border). The approach chosen for the model specification allows the identification of country-specific deviations from the average export relations in intra-EU trade and in the trade between the EU and the five CEECs.

The question raised in this contribution is whether the structural backwardness (small degree of openness toward the EU) of the five CEECs (qua exporters to the EU and importers from the EU) will be gradually reduced by the process of accession itself. In order to evaluate the effects of a ceteris paribus reduction in these deviations, the simulations were based on the assumptions that the structural differences of the CEECs would be completely eliminated by the hypothetical time of accession (2004 for Hungary, Poland, the Czech Republic and Slovenia, and 2010 for the Slovak Republic). The average annual growth rates predicted by the model for bilateral trade flows between Austria and the five CEECs are very high (between 14.4 and 13.2 percent), but they do not deviate in a striking way from the growth rates of Austria's nominal exports to these countries actually observed during the 1990s: Poland 15 percent (1993-1997), Hungary 19 percent (1989-1997), the Czech Republic 17 percent (1993-1997), Slovak Republic 24 percent (1993-1997), and Slovenia 18 percent (1992-1997). Even though the structural weaknesses of the CEECs will probably be eliminated over a long time period, it should be emphasised that the growth rates recorded for trade with the CEECs indicate that structural change is already under way; this process is likely to continue and is being facilitated by the current accession negotiations and by the so-called Europe Agreements, which would facilitate the reduction of tariffs and other barriers to trade, the support for infrastructure investment, the inflow of foreign direct investment the related transfer of know-how.