EU Integration and Trade: A Look from the Outside of the EU Eastern Border

The paper investigates the costs and benefits of 2004 EU enlargement from the standpoint of Ukraine - a country that has been left behind. This angle allows estimating the costs of non-integration that occurred due to trade diversion and forgone opportunity to carry our structural changes in the Ukrainian economy. According to the results, even though the EU integration would not significantly increase the cumulative aggregate export of Ukraine in 2000- 2007, it would dramatically change the composition of its exports by almost doubling exports of manufactured goods by 2007. The costs of non-integration are increasing towards the end of the investigated period. Therefore, projecting the results into the future clearly indicates that the benefits of EU accession for Ukraine would have been unambiguously positive. The results shed some light on the debates over the benefits of EU integration for the newly accepted states by showing that costs of non integration are high. They also give some guidance on the potential gains from signing a deep FTA between EU and Ukraine and from potential EU accession of Ukraine in the future. The paper also adds to the literature by developing a methodology of estimating a gravity equation for disaggregated data that can be widely used for estimating potential costs and benefits from a trade policy change.