The European Union’s effect on Swedish trade : A study of trade diversion and trade creation

This Bachelor thesis investigates if the Swedish trade has faced trade diversion and or trade creation after entering the European Union (EU). This is done by analyzing Sweden’s trade pattern of goods before and during the membership using a selected time-period of 1985-2004. To be able to investigate if Sweden has faced trade diversion and trade creation we apply the Soloaga and Winters model (2000) which is based on the gravity model of trade and we modify it to fit our purpose. By using the modified version we run a pooled panel data regression where we divide the time-period into two groups, a before (1985-1994) and during (1995-2004) EU membership group and we included eight different variables to estimate trade diversion and creation. After running the pooled panel data, we could conclude that Sweden has faced 44 percent trade diversion by diverting its trade from non-members to member states in the EU. Sweden has also increased its trade to EU member states by 106 percent implying trade creation. However since we have not included an exchange rate variable these figure cannot be used as direct percentages to estimate trade diversion and creation, they are instead used as a point of reference. ii