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Article Excerpt
In this research study, a gravity model approach was used in order to analyze the main factors affecting the trade flows of wine in the EU. The empirical model was applied using data for the first twelve EU countries for the period 1989-97. It has been clearly shown in the empirical literature that gravity models can be successfully applied to a single commodity market. The present study utilized pooled cross-sectional and time series data in a one-way fixed effects model that accounted for country-pair heterogeneity. The results revealed that wine trade was positively influenced by an increase in GDP per capita, since greater income promotes trade. The remoteness of one country from another influenced exports positively and imports negatively, and the quantities traded did not prove to be very sensitive to wine prices. The depreciation of EU currencies and the high production of wine in the EU increased exports and reduced imports, while EU integration enhanced trade among members. (JEL Q10)
Introduction
There is an interdependent relationship between international trade and agricultural development. Agricultural development causes an increase in trade, and in turn, an increase in trade stimulates agricultural development [Koester, 1993]. This is the reason why a country tries to improve its international trade in order to bring about domestic growth and development. Nowadays, international trade in agricultural products, now recognized as the engine of agricultural growth, has begun to be influenced to a considerable extent by national agricultural policies, which has led to an increase in output, import protection, and export expansion [MacLaren, 1991].
Traditional theories of international trade maintain that countries will specialize in producing and exporting those commodities for which they hold a competitive advantage. However, an examination of actual trade flows often reveals the simultaneous import and export of a product by a particular country [Ortalo-Magne, 1992]. This is the case with the European Union (EU), the world's leading exporter and importer of wine. The EU wine sector leads in terms of production (accounting for 45 percent of land used for vine cultivation in the world and 60 percent of world wine production), consumption (60 percent of world consumption), exports (70 percent of world exports), and imports. The EU faces the problems of wine overproduction and a decline in the consumption of wine (Figure 1), but still maintains a clear advantage of exports over imports of wine (Figure 2). The Common Market Organization (CMO) for wine is the most complex and broadest within the Common Agricultural Policy (CAP), covering not only tradition al measures, but also other more technical matters specific to the wine sector (for example, provisions concerning production, trade, and the release to the market of wine products and oenological practices). Regulation 1493/1999 concerning the CMO of the market of wine, which came into effect in 2000, was designed to respond to the developments which had occurred, for example, the implementation of the Uruguay Round Agreements, which allowed not only for a more flexible and open Community market, but also for one where existing CMO measures were no longer so effective [European Commission, 2000]. As such, the objective of this study was to identify and evaluate the factors affecting the volume of wine traded in the EU.
The increased interest in and interdependence of the economies of countries involved in trade has led to the development of many trade models. Since the objectives of the present paper required the adoption of a theoretical framework that combined the economic forces at the flow's origin, the economic forces at the flow's destination, and the economic forces either aiding or resisting the flow's movement from origin to destination, it was appropriate to adopt the gravity model for the purpose of this study.
The gravity model has been used as far back as the early 1960s in order to explain bilateral trade flows. In its basic form, the model supposes that the volume of trade between any two partners is an increasing function of their national incomes and a decreasing function of the distance between them that increases transportation and other transaction costs. Over the years, several authors have used various additional variables that enhance or resist trade (populations, per capita income, producer or consumer subsidies, and other variables), in order to enrich the analysis of trade between pair-countries. It has also became common to use dummy variables in order to capture contiguity effects, cultural and historical similarities, common language, regional integration, political blocs, and patent rights, to name a few.
In order to accomplish the objectives of this work, the paper has been organized as follows. The next section outlines the use of gravity models in international trade. In the following section, the gravity model for the wine trade is specified and a data description and an explanation of the econometric procedures are given. The fourth section estimates the gravity model and discusses the findings. Finally, conclusions are drawn based on the findings.
Using the Gravity Model
As the name implies, the gravity model adapts the gravitational concept, as advanced by Newton in 1686, to the problem of any form of exchange between two social groups. The gravity model of international trade was developed independently by Tinbergen [1962] and Poyhonen [1963]. In its basic form, the amount of trade between two countries is assumed to increase in size, as measured by national incomes, and decrease in the cost of transport between them, as measured by the distance between their economic centers.
Linnemana [1966] was the first to develop the most common justification of the gravity model, used by Aitken [1973], Geraci and Prewo [1977], Prewo [1978], Abrams [1980], and Sapir [1981]. It was asserted that the gravity model is a reduced form of a four-equation partial equilibrium model of export supply and import demand.
The equation in its basic form takes the following specification:
[T.sub.ij] = f([Y.sub.i], [Y.sub.j], [F.sub.ij]) (i,j =...
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