Industrial Specialisation in the European Union: A Test of the New Trade Theory

Industry location in the European Union is examined in order to explore the relevance of the “new” theories of trade and economic geography. The analysis is based on a set of highly disaggregated intra-industry trade indices for 1961- 1990, complemented by sectoral employment statistics for EU countries and regions. It is found that, as predicted by the “new” theories, increasing returns industries are strongly concentrated at the economic core of the EU and display low levels of intra-industry trade. High tech industries are also highly localised, but show no centre-periphery gradient and no specific pattern of intra-industry trade. The main potential for future specialisation appears to remain in sectors sensitive to labour costs, which are still relatively dispersed and have high levels of intra-industry trade. Employment in these industries is shifting towards the EU periphery. “Classical” determinants of international specialisation are thus expected to dominate the impending adjustment process in EU manufacturing.