Trade, competitiveness and investment: an empirical assessment

The Eurozone crisis has exposed several weaknesses of the European Monetary Union economies. This paper aims to assess the impact on external competitiveness of an expansionary capital stock policy that could contribute to reduce the trade balance asymmetries within the EU and help European exporters to recover their competitive role in international markets. A policy action to increase capital stock accumulation through investment in selected European countries could generate a double dividend: increasing both price and non-price competitiveness, so stimulating their competitive position as exporters, and consolidating the growth path of EU economy. The analysis employs a Bilateral Trade Model built at INFORUM with several distinguishing characteristics: a comprehensive bilateral dataset, econometric estimation of key parameters, and emphasis on sectoral details. Our findings show that a capital stock increase is effective in narrowing trade imbalances within EU. Heterogeneous effects are estimated for commodities in China and the US.