Reversal of economic integration: evidence from European Union enlargement

Abstract Empirical models of trade agreements implicitly assume that withdrawal from a trade agreement has an equal and opposite trade effect as accession (i.e., symmetry). With increasing opposition to international economic cooperation, it becomes urgent to test this assumption. We analyze a quasi‐natural experiment to explicitly test the symmetry assumption in the context of the termination of a free trade agreement (FTA) using the gravity model. In 2004, Estonia joined the European Union, which mandated that it withdraw from its FTA with Ukraine. Carefully controlling for possible confounding effects of European Union enlargement using a variety of methods, we isolate the FTA withdrawal effect and find strong support in favour of symmetry. Moreover, while import tariffs matter, the bulk of the effect comes from non‐tariff effects of an FTA. General equilibrium estimates suggest that the FTA withdrawal led to a noticeable welfare loss for members.