Trade Liberalization and Technological Progress in the Case of the Euroean Union

Technology and trade are driving forces of global economic transformation that started in 1970s. Unilateral, bilateral and multilateral trade liberalization further promoted innovation and technological transformation, thus raising productivity, specially in developed countries. European Union (EU) is one of the key promotors of trade liberalization and since 2006 promotes particularly bilateral trade agreements with other developed and developing countries since multilateral trading system has stalled since Uruguay round of negotiations. EU recognized that in order to increase its global competitiveness, specially with respect to United States and Japan, it needs to push liberalization further through bilateral agreements. The main goal of the paper is to quantify the effects of EU's bilateral trade agreements since 2006 on productivity growth, that is we, indirectly measure the effect of trade liberalization of competitiveness of EU. We group EU member states in clusters according to the size of these effects. We use data obtained from Penn World Table and World Trade Flows bilateral data. We develop both static and dynamic trade models to estimate the beforementioned effects. Our findings show that trade liberalization had heterogeneous effects of EU member states, thus highlighting the problem of Two Speed Europe from trade aspect as well. This implied that current and future EU trade agreements should be carefully monitored/negotiated if the final goal of the agreements is to increase welfare of all EU countries.