European telecom liberalization and foreign trade - Theory, gravity equation analysis and policy implications

The liberalization of telecommunications has contributed to considerable price reductions in international telephony and to rising volumes of telecommunications. This raises the issue of the economic impact of international telephony. Falling international information and transaction costs should stimulate competition and enlarge the market radius for producers in the tradables sector - this lets us to expect trade creation effects of international telecommunications. Based on a modified gravity equation which is taking into account the role of international telecommunication volumes we show that international telephony has a significant positive impact on trade volume; at the same time the coefficients of the traditional variables, GDP in the exporting and the importing country, are smaller than in traditional approaches. Thus from a policy perspective the modernization and growth of the international telecommunications network - within a system of enhanced competition - is crucial for Europe: economic integration will be reinforced.