Europe’s Internal Market at Fifty: Over the Hill?∗

For more than half a century, members of the European Union (EU) have pursued policies aimed at reducing the cost of cross-border trans-actions. Using a closed-form solution for the non-linear gravity system of Anderson and Van Wincoop (2003) we find that Internal Market policies have created trade between EU members, while diversion of trade with non-members has been limited. Around 1995, 18 percent of total trade by EU15 countries can be attributed to the Internal Mar-ket. In the second half of the 1990’s the European advantage started to deteriorate relative to other trade flows: in 2005 the contribution of the Internal Market was just 9 percent. Most enlargements of the EU have had a positive impact on trade