Exploring European regional trade

A new study from Warwick Economics has revealed that a region trades with itself much more than with other regions in the same country, or with regions in different countries.

Dr Marta Santamaria and co-authors Dr. Jaume Ventura (CREi/University Pompeu Fabra) and Dr. Ugur Yesilbayraktar (University of Duisburg-Essen) analysed a newly-built dataset* of European regional trade flows to explore trade patterns within and across country borders. Based on the European Road Freight Transport survey, the data cover trade in goods among 269 regions from 24 European countries between 2011 and 2017. This trade is disaggregated into 12 different industries covering all agriculture, mining and manufacturing.

Out of all shipments in the sample, 40% had a destination inside the same region as their origin (home trade), while 41% had a destination in a different region but within the same country (country trade). Surprisingly, only 19% of trade flows were between regions in different countries (foreign trade).

However, when correcting for economic size – accounting for the fact that regional markets are smaller than country markets, which are smaller than foreign markets - the researchers found enormous differences in the magnitudes of the different types of trade. Their findings revealed that, on average, trade levels within the same region are 42 times higher than the average trade between two regions in the same country. In turn, two regions in the same country trade almost ten times more than two regions in different countries.

The researchers examined whether geographic and national borders could explain these differences. They found that these two factors together accounted for two-thirds of the variation in trade flows. For example, a 1% increase in geographical distance between regions is associated with a reduction in trade of 1.2%.

However, distance could not explain why trade shipments within regions were so much larger than across regional borders. The researchers found this was instead at least partly due to the impact of subnational governments. Their analysis showed that political borders within countries (dividing regions with some form of self-government) significantly reduced trade, while purely administrative regional borders (dividing regions created for statistical purposes without any form of political power) had no effect on trade.

Commenting on the research, Dr Santamaria said: “While we know much about trade across countries thanks to the availability of detailed customs data, we know much less about trade within countries. This paper is the first to systematically explore trade patterns across and within European regions.”

“There are many exciting opportunities for future research in this area. For example, how does the behaviour or autonomy level of local governments account for the effect of political borders on reducing trade flows across regions? How is trade between regions impacted by factors such as migration flows or foreign direct investment?"

“Constructing similar models for other social and cultural interactions such as travel, tourism and collaborative working would also help us form a better picture of how European citizens interact with each other.”

* The construction of this new dataset is described in Santamaria et al., 2021.

Read the full article

Exploring European regional trade by Marta Santamaria, Jaume Ventura and Uğur Yeşilbayraktar is forthcoming in the Journal of International Economics. The corrected proof was published in April 2023.

Marta Santamaria is Assistant Professor in the Department of Economics at Warwick. View her staff profile.