Intra-Industry trade in the Baltic Sea region

The purpose of this paper is to analyse economic integration in the Baltic Sea Region as it has emerged from mid-1990s. More importantly, we seek to assess the quality of integration as conferred by the development of intra-industry trade between the two groups of countries in the Baltic Sea region: Finland, Sweden, Denmark and Germany at the Western coast, and Estonia, Latvia, Lithuania and Poland at the Eastern coast of the Baltic Sea.

The change of several variations of the Gruber Lloyd index over the last decade indicates an increase in intra-industry trade between the above two groups of countries, but the increase is not huge. The analysis of intra-industry trade within the top 25 commodity groups reveals a remarkable increase of the share of intra-industry trade from the East to the West in a number of modern industries, such as metal and machinery, and automobile production, production of electrical equipment and telecom equipment, etc. The share of intra-industry trade has remained, at the same time, largely unaltered in traditional resource- and/or labour-intensive industries, such as wood processing and furniture or textiles and apparel production.

The analysis of the change in the quality of the traded goods reveals, however, that the economic intergration in the Baltic Sea Region has so far not led to a vast increase of the competitiveness of industry at the relatively less developed Eastern coast of the Baltic Sea. The equalisation of market prices has predominantly taken place in the trade of raw materials, whereas the Eastern countries continue to trade with deficit in the majority of manufactured goods where the equalisation of unit prices has actually taken place.

The above seems to support the results of our previous research, in which we have concluded that the economies of the Baltic States and Poland continue to act as lower value-added parts of the cross-border clusters in the Baltic Sea Region. Consequently, if catching up in living standards with the northern and western neighbours is envisioned, much more systematic investment into education and technology is needed in the Baltic States and Poland.