## insea2025005

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---

### Europe’s Medium-Term Growth Outlook and Reform Priorities
- Europe’s per-capita GDP in PPP terms is nearly 30 percent lower than in the US, with around three-quarters of the gap due to lower productivity.
- Under current projections, there is no sign of convergence to US GDP per capita levels; Europe’s income gap could be widening slightly.
- The top one-third of EU regions by employment density accounts for 60 percent of EU GDP.
- Broadly agreed priority areas for boosting growth:
  - Closing domestic structural policy gaps to the global frontier.
  - Tackling remaining intra-EU trade costs.
  - Removing barriers to intra-EU labor mobility.
  - Advancing the Capital Markets Union.
  - Having a single market for energy.

### Quantified Aggregate Gains from Reform Packages
- Fully closing domestic structural policy gaps to the global frontier and lowering intra-EU cross-border barriers (trade and labor mobility) to levels observed within the United States would raise EU productivity by 20.2 percent.
  - National-level reforms account for 9.9 percent of the total gain.
  - Lowering trade costs accounts for 5.7 percent.
  - Lowering mobility frictions accounts for 4.5 percent.
- An intermediate reform package that halves these gaps would yield aggregate productivity (per-capita income) gains of 8.7 percent.
- Estimates are lower bounds because the model assumes fixed aggregate EU employment and no capital accumulation; second-round effects (higher investment and inflows of skilled workers) would add to gains.

### Core Mechanisms: Production Hubs and Agglomeration
- Europe’s productivity underperformance is driven primarily by inefficiencies in production hubs where firms cluster.
- Agglomeration externalities: higher total employment in a region raises firm productivity via deeper talent pools, infrastructure, larger product markets, and learning spillovers.
- Effective domestic and EU-level reforms can:
  - Make existing production hubs more productive.
  - Allow existing hubs to grow and new hubs to emerge in high-potential regions.
  - Spread benefits beyond large cities to many middle-density regions.
- Some low-density regions could see lower productivity because of out-migration when intra-EU labor mobility barriers fall.

### Model and Analytical Approach
- Uses a general equilibrium spatial model building on Redding (2016) with:
  - Heterogeneous regions (calibrated at the NUTS2 level).
  - Internal economies of scale in production.
  - Costly trade between regions.
  - Worker mobility decisions.
  - Endogenous agglomeration externalities and firm heterogeneity in intrinsic productivity and firm-level distortions.
- Employment density (workers per square km) is the primary measure of clustering.
- Model calibrated to match employment, output, and estimated intra-EU trade costs of NUTS2 regions.
- Key modeling assumptions:
  - Aggregate EU employment is fixed.
  - No capital accumulation is modeled.
  - Factor mobility counterfactuals are based on spatial employment patterns.
- Reported aggregate benefits should be interpreted as conservative lower-bound estimates.

### Distributional and Spatial Implications
- Most countries and most regions would gain from combined reform packages.
- Gains accrue to high-density and many middle-density regions.
- Worker relocation to higher-productivity areas can cause small productivity declines in some regions; these reductions are a small share of total gains.
- Policy sequencing matters: frontloading domestic reforms in lagging regions can contain negative spillovers from increased mobility and agglomeration.

### Policy Design to Maximize and Share Gains
- Complementary EU-level coordination and domestic reforms are needed to unlock constraints and increase intra-EU trade and labor mobility.
- Policy levers to make reforms successful on the ground:
  - Ensuring affordable housing in growing production hubs to accommodate relocations without excessive congestion costs.
  - Policies targeting positive spillovers within hubs (for example, strengthening local infrastructure and innovation ecosystems).
  - Support to lagging regions that does not hinder agglomeration benefits—for example, contributions to national and EU budgets that scale up with economic activity to finance continued provision of key services.
  - Frontloading domestic reforms in lagging regions to reduce the risk of adverse local outcomes from worker relocations.
- Coordinated actions combining national-level resource reallocation (improving firm-level wedges and business dynamism) with EU-level single-market deepening (lower trade costs and mobility frictions) maximize aggregate and spatial gains.

### Appendix: Capital Accumulation and Attraction of Foreign Talent
- Capital accumulation can amplify productivity gains under long-term stationarity of the capital-output ratio and a common capital share of 1/3.
- Back-of-the-envelope magnification: productivity gains should be magnified by a power of about 1.5.
- Example: "productivity gains of 20.2 percent are magnified by a factor 1.202 (3/2), where (3/2) is the inverse of 1 minus the capital share."
- Accounting for capital accumulation in the full reform scenario would narrow the 2024 EU per capita GDP current PPP gap with the US from 27.4 percent to 4.4 percent.
- Appendix notes the EU attracting foreign talent as productivity rises yields nonnegligible but modest additional effects compared to large aggregate gains.

### Gains by Reform Type (Intermediate Reform Package)
- All countries gain when reforms are pursued jointly.
- Domestic structural reforms (closing half of existing structural gaps):
  - Increase productivity by 6.4 percent in the EU CESEE region.
  - Increase productivity by 4.9 percent in EU advanced economies excluding CESEE.
- Reducing trade barriers (halving the distance to intra-US level):
  - Increases EU productivity by about 1.8 percent.
  - CESEE productivity gain: 2.4 percent.
  - EU advanced economies excluding CESEE productivity gain: 1.8 percent.
- Reducing mobility barriers (halving the gap with US in how employment rises with real wages):
  - Would increase aggregate output by about 1.8 percent.
  - Productivity in EU advanced economies excluding CESEE increases by 1.6 percent.
  - Productivity in the EU CESEE region declines by 1.4 percent if mobility reform is pursued in isolation.
  - Significant migration from isolated mobility reform implies EU CESEE GDP declines further.

### Combined Effects, Complementarities, and Distribution
- Combined reforms implemented together yield gains for all countries.
- Domestic structural reforms combined with lower intra-EU trade costs produce positive complementarity:
  - Amplifies aggregate gains by about 0.1 percentage point relative to individual gains from structural reforms and trade integration alone.
- Domestic reforms do not show the same complementarity with labor mobility reforms:
  - Higher labor mobility can lead to workers leaving regions that benefit most from structural reforms, reducing complementarity.
- Policy implication: Coordinated domestic and EU-level reforms, together with national redistribution mechanisms, can help share gains widely and mitigate regions that fall behind.

### Modeling, Data Coverage, and Caveats
- Calibration uses firm-level data from Orbis and covers about 80 percent of NUTS2 regions in the EU.
- Notes potential sample bias where small firms are underrepresented in some countries.
- Under uneven reform implementation, regions that reform more strongly gain most while laggard regions can lose workers and productivity because of scale economies.
- Simulations treat labor as a composite input including other factors of production (equipped labor) in first-pass assessments.

### Aggregate and Regional Productivity Findings
- EU-wide productivity gains from reforms are reported as 1.8 percent, larger than gains in each of two country groupings (1.6 and 1.4 percent).
- Europe’s NUTS3 regions have on average higher employment density than US counties, but regions with a one percentage point higher employment density have on average only two-thirds of the higher labor productivity than in the US.
- Estimated labor productivity–density relationship fits:
  - EU Fit, beta = 0.09.
  - US Fit, beta = 0.15.
- In the calibrated model, the EU’s productivity elasticity to density is 0.12; the reform package that closes half of the gaps increases the elasticity to 0.14.

### Local Conditions Limiting Hub Productivity (Empirical Evidence)
- Joint empirical estimates identify three key local conditions; when considered jointly, only human capital, private sector size, and market access remain statistically significant drivers of productivity.
- Conditional on employment density and level of human capital:
  - Increasing market access from median to 75th percentile could boost labor productivity by 2.9 percent.
  - Increasing private sector presence from median to 75th percentile could boost labor productivity by 2.0 percent.
- Intra-EU ad-valorem trade cost estimates:
  - intra-EU ad-valorem trade costs of 44 percent on average across manufacturing goods sectors.
  - 110 percent on average across services sectors (sectoral estimate).
- Policy-actionable reforms to financial fragmentation could raise cross-border venture capital flows in the EU by about 13 and 20 percent through harmonizing the EU legal system and simplifying withholding tax procedures, respectively.

### Spatial Reallocation and Misallocation Gains
- Reallocating capital and labor could raise total factor productivity from 5 to over 20 percent (sectoral variation).
- Spatial reallocation gains decomposed as:
  - Across countries: reallocating capital and labor across countries while holding within-country firm distributions fixed.
  - Between regions: redistributing factors between regions within each country while holding within-region firm distributions and country-level factor endowments unchanged.
- Sectoral examples show overall EU-level gains up to about 20–25 percent in some sectors.

### Distributional Outcomes of the Intermediate Reform Package
- Reforms increase the ability of existing hubs to turn density into productivity, with higher gains in medium- and high-density regions.
- Regions that expand include current high-density hubs and high-potential previously medium-density regions (around one-third of the top quintile of expanding regions are initially medium density).
- Negative impacts:
  - Some regions experience productivity declines as workers migrate to more productive regions.
  - In the intermediate reform package, productivity in regions that decline falls by less than 3 percent (employment-weighted average).
  - Restoring per capita incomes of those staying in regions where productivity declines to their pre-reforms level would require transfers that represent less than 2 percent of aggregate gains.
  - One-third of regions in the bottom employment density tertile see productivity decline, compared to about 5 percent in the top employment density tertile.

### Policy Levers and Recommendations (Country and EU Levels)
- Early and ambitious domestic structural reforms are central; national-level efforts should be frontloaded because they benefit less dense regions and facilitate adjustment to EU-level reforms.
- Priorities for CESEE and other regions:
  - Labor market regulations that facilitate reallocation.
  - Boosting human capital.
  - Improving growth-friendliness of tax systems.
  - Addressing governance shortcomings where relevant.
- EU-level and cross-border priorities:
  - Deepening the EU single market to reduce intra-EU trade costs (harmonizing regulations, opening protected sectors, addressing cross-border infrastructure shortcomings).
  - Reducing barriers to worker and capital mobility, including addressing pension portability and pursuing mutual recognition agreements for professional services.
  - Establishing a 28th corporate regime—a voluntary EU-wide corporate and insolvency framework open to all legal business entities to simplify cross-border firm operations.
- Local and place-based policies:
  - For expanding hubs: ease constraints on housing construction (for example, by adjusting zoning regulations), provide targeted and temporary housing allowances, and scale up local public services.
  - For receiving regions: invest in infrastructure and education, consider joint grant programs for firms and universities, and design policies to attract talent (for example, address job opportunities for spouses).
  - To share aggregate gains without undermining productivity incentives: use contributions to national and EU budgets that increase with economic activity (for example, via value-added tax collection) and combine place-based support with structural reforms (for example, performance-based budgeting).
  - Maintain social safety nets as a permanent mechanism to provide support irrespective of location.

### Box 2.1 — Sizing up the Scope for Reducing Intra-European Union Trade Barriers (Approach, Findings, Implications)
- Approach and data:
  - Extended a gravity approach to include US states as individual economies.
  - Data: OECD ICIO database, US Census Commodity Flows Survey, US Census foreign trade data by state.
  - Vintages: 2007, 2012, 2017, and 2022.
  - Scope restricted to goods sectors.
  - A common trade elasticity value of 5 is used to compute ad-valorem equivalents.
- Key empirical findings:
  - Trade barriers have remained roughly at the same level since 2007 across most economies, including those within the EU.
  - Estimated barriers between the US and China increased by about 15 percent (2022 relative to 2007).
  - Level estimates (upper bound) for aggregate manufacturing goods:
    - Ad-valorem costs for trade between EU members: about 40 percent (2022).
    - Intra-US estimated costs: about 26 percent in 2022.
- Caveats:
  - Level estimates may overstate actionable trade barriers because time-invariant preferences and other unmeasured drivers can be absorbed into estimated trade costs.
  - Analysis limited to goods; no intra-US services data were available for inclusion.
- Implication:
  - The difference between estimated intra-EU ad-valorem costs (about 40 percent) and intra-US costs (about 26 percent) suggests measurable remaining scope for further intra-EU liberalization of goods trade.

*International Monetary Fund — Executive Summary (insea2025005)*

### Executive Summary ......................................................................................................

### Executive Summary

### Europe’s Medium-Term Growth Outlook and the Case for Reform
- Europe’s medium-term growth prospects remain subdued; the EU’s per-capita GDP in purchasing power parity (PPP) terms is nearly 30 percent lower than in the US, with around three-quarters of the gap due to lower productivity.
- Under current projections, there is no sign of convergence to US GDP per capita levels; Europe’s income gap could be widening slightly.
- The top one-third of EU regions by employment density accounts for 60 percent of EU GDP, underscoring the centrality of production hubs for aggregate productivity.
- Broadly agreed priority areas for boosting growth:
  - (1) Closing domestic structural policy gaps to the global frontier.
  - (2) Tackling remaining intra-EU trade costs.
  - (3) Removing barriers to intra-EU labor mobility.
  - (4) Advancing the Capital Markets Union.
  - (5) Having a single market for energy.

### Quantified Aggregate Gains from Reform Packages
- Fully closing domestic structural policy gaps to the global frontier and lowering intra-EU cross-border barriers (trade and labor mobility) to levels observed within the United States would raise EU productivity by 20.2 percent.
  - About half of this total gain (9.9 percent) stems from national-level reforms.
  - The remainder stems from single-market deepening: lowering trade costs accounts for 5.7 percent; lowering mobility frictions accounts for 4.5 percent.
- An intermediate reform package that halves these gaps would yield aggregate productivity (per-capita income) gains of 8.7 percent.
- These estimates are lower bounds because the model assumes fixed aggregate EU employment and no capital accumulation; second-round effects through higher investment and inflows of skilled workers would add to gains.

### Core Mechanisms: Production Hubs and Agglomeration
- Europe’s productivity underperformance is driven primarily by inefficiencies in production hubs where firms cluster.
- Agglomeration externalities: higher total employment in a region raises the productivity of firms located there by allowing access to deeper pools of talent, infrastructure, larger product markets, and stronger learning spillovers.
- Effective domestic and EU-level reforms can:
  - Make existing production hubs more productive.
  - Allow existing hubs to grow and new hubs to emerge in high-potential regions.
  - Spread benefits beyond large cities to many middle-density regions as well.
- However, some low-density regions could see lower productivity because of out-migration when intra-EU labor mobility barriers fall.

### Model and Analytical Approach
- Uses a general equilibrium spatial model building on Redding (2016) with:
  - Heterogeneous regions (calibrated at the NUTS2 level).
  - Internal economies of scale in production.
  - Costly trade between regions.
  - Worker mobility decisions.
  - Endogenous agglomeration externalities and firm heterogeneity in intrinsic productivity and firm-level distortions.
- Employment density (workers per square km) is the primary measure of clustering.
- The model is calibrated to match employment, output, and estimated intra-EU trade costs of NUTS2 regions.
- Key modeling assumptions:
  - Aggregate EU employment is fixed.
  - No capital accumulation is modeled.
  - Factor mobility counterfactuals are based on spatial employment patterns; an explicit role for capital (for example, venture capital) is noted for future work.
- Because of these assumptions, aggregate benefits reported should be interpreted as conservative lower-bound estimates.

### Distributional and Spatial Implications
- Most countries and most regions would gain from the combined reform packages.
- Gains accrue both to highly populated (high-density) regions and often to middle-density regions.
- As workers relocate to higher-productivity areas, some regions within countries may experience small productivity declines; these reductions are a small share of total gains.
- Policy sequencing matters: frontloading domestic reforms in lagging regions can contain negative spillovers from increased mobility and agglomeration.

### Policy Design to Maximize and Share Gains
- Complementary EU-level coordination and domestic reforms are needed to unlock constraints and increase intra-EU trade and labor mobility.
- Policy levers to make reforms successful on the ground include:
  - Ensuring affordable housing in growing production hubs to accommodate relocations without excessive congestion costs.
  - Policies explicitly targeting positive spillovers within hubs (for example, strengthening local infrastructure and innovation ecosystems).
  - Support to lagging regions that does not hinder agglomeration benefits—for example, contributions to national and EU budgets that scale up with economic activity to finance continued provision of key services.
  - Frontloading domestic reforms in lagging regions to reduce the risk of adverse local outcomes from worker relocations.
- Coordinated actions that combine national-level resource reallocation (improving firm-level wedges and business dynamism) with EU-level single-market deepening (lower trade costs and mobility frictions) maximize aggregate and spatial gains.

*International Monetary Fund — Executive Summary (insea2025005)*

### Appendix includes details on how to assess the additional impact of the EU attracting foreign talent as a result of beco

### insea2025005 - Appendix includes details on how to assess the additional impact of the EU attracting foreign talent as a result of becoming more productive, with the effects being nonnegligible but modest compared to the large aggregate gains

### Capital accumulation and magnification of productivity gains
- Capital accumulation can amplify productivity gains under long-term stationarity of the capital-output ratio and a common capital share of 1/3.
- Back-of-the-envelope magnification: productivity gains should be magnified by a power of about 1.5.
- Example given: "productivity gains of 20.2 percent are magnified by a factor 1.202 (3/2), where (3/2) is the inverse of 1 minus the capital share."
- Accounting for capital accumulation in the full reform scenario would narrow the 2024 EU per capita GDP current PPP gap with the US from 27.4 percent to 4.4 percent.
- Explicitly modeling capital may alter benefits of reallocating production across regions, but a first-pass assessment suggests similarity to labor reallocation benefits because labor can be treated as a composite input (equipped labor).

### Gains by reform type (intermediate reform package)
- Aggregate finding: All countries gain when reforms are pursued jointly.
- Domestic structural reforms (concerted push to close half of existing structural gaps):
  - Increase productivity by 6.4 percent in the EU Central, Eastern, and Southeastern Europe (CESEE) region.
  - Increase productivity by 4.9 percent in EU advanced economies excluding CESEE.
- Reducing trade barriers (to halve the distance to intra-US level):
  - Increases EU productivity by about 1.8 percent.
  - CESEE productivity gain: 2.4 percent.
  - EU advanced economies excluding CESEE productivity gain: 1.8 percent.
- Reducing mobility barriers (halving the gap with US in how employment rises with real wages):
  - Would increase aggregate output by about 1.8 percent.
  - Productivity in EU advanced economies excluding CESEE increases by 1.6 percent.
  - Productivity in the EU CESEE region declines by 1.4 percent if mobility reform is pursued in isolation.
  - Significant migration from isolated mobility reform implies EU CESEE GDP declines further (see Online Appendix referenced in source).

### Combined effects, complementarities, and distribution
- Combined reforms implemented together yield gains for all countries (Figure 2.4, gray bars).
- Domestic structural reforms combined with lower intra-EU trade costs produce positive complementarity:
  - Amplifies aggregate gains by about 0.1 percentage point relative to individual gains from structural reforms and trade integration alone.
- Domestic reforms do not show the same complementarity with labor mobility reforms:
  - Higher labor mobility can lead to workers leaving regions that benefit most from structural reforms, reducing complementarity.
  - Nonetheless, domestic reforms help ensure the EU CESEE region directly gains in the aggregate even if aggregate EU-level gains are not fully shared across countries.
- Policy implication: Coordinated domestic and EU-level reforms, together with national redistribution mechanisms, can help share gains widely and mitigate regions that fall behind.

### Modeling, data coverage, and caveats
- Calibration uses firm-level data from Orbis and covers about 80 percent of NUTS2 regions in the EU.
- Notes potential sample bias in some countries where small firms are underrepresented (example countries listed in source).
- Under uneven reform implementation, regions that reform more strongly gain most while laggard regions can lose workers and productivity because of scale economies.
- Simulations treat labor as a composite input including other factors of production (equipped labor) in first-pass assessments.

*INTERNATIONAL MONETARY FUND | November 2025*

### conclusions on specific countries.

### conclusions on specific countries.

### Aggregate and regional productivity findings
- EU-wide productivity gains from reforms are reported as 1.8 percent, larger than gains in each of two country groupings (1.6 and 1.4 percent).
- Europe’s NUTS3 regions have on average higher employment density than US counties, but regions with a one percentage point higher employment density have on average only two-thirds of the higher labor productivity than in the US.
- Estimated EU fits for the labor productivity–density relationship: EU Fit, beta = 0.09; US Fit, beta = 0.15.
- In the calibrated model, the EU’s productivity elasticity to density is 0.12; the reform package that closes half of the gaps increases the elasticity to 0.14.

### Local conditions limiting hub productivity (empirical evidence)
- Joint empirical estimates identify three key local conditions; when considered jointly, only human capital, private sector size, and market access remain statistically significant drivers of productivity.
- Conditional on employment density and level of human capital, increasing:
  - market access from median to 75th percentile could boost labor productivity by 2.9 percent;
  - private sector presence from median to 75th percentile could boost labor productivity by 2.0 percent.
- Intra-EU ad-valorem trade cost estimates cited:
  - intra-EU ad-valorem trade costs of 44 percent on average across manufacturing goods sectors;
  - 110 percent on average across services sectors (sectoral estimate).
- Policy-actionable reforms to financial fragmentation could raise cross-border venture capital flows in the EU by about 13 and 20 percent through harmonizing the EU legal system and simplifying withholding tax procedures, respectively.

### Spatial reallocation and misallocation gains
- Production-side spatial misallocation accounting indicates potential gains from reallocating capital and labor:
  - Such reallocation could raise total factor productivity from 5 to over 20 percent (sectoral variation; larger gains indicate larger dispersion in productivity across locations).
- Spatial reallocation gains are decomposed as:
  - Across countries: potential gains from reallocating capital and labor across countries while holding within-country firm distributions fixed.
  - Between regions: gains from redistributing factors between regions within each country while holding within-region firm distributions and country-level factor endowments unchanged.
- Sectoral examples of spatial reallocation gains (percent of total factor productivity) include manufacturing and other sectors; overall EU-level gains vary by sector (figures show up to about 20–25 percent in some sectors).

### Distributional outcomes of the intermediate reform package
- Reforms increase the ability of existing hubs to turn density into productivity, with higher gains in medium- and high-density regions.
- Regions that expand following reforms include both current high-density hubs and high-potential regions that were not previously the densest (around one-third of the top quintile of expanding regions are initially medium density).
- Negative impacts:
  - Some regions experience productivity declines as workers migrate to more productive regions.
  - In the intermediate reform package including domestic structural reforms, lower trade costs, and lower mobility barriers, productivity in regions that decline falls by less than 3 percent (employment-weighted average).
  - Restoring per capita incomes of those staying in regions where productivity declines to their pre-reforms level would require transfers that represent less than 2 percent of aggregate gains.
  - One-third of regions in the bottom employment density tertile see productivity decline, compared to about 5 percent in the top employment density tertile.

### Policy levers and recommendations
- Early and ambitious domestic structural reforms are a central pillar; national-level efforts should be frontloaded because they benefit less dense regions and facilitate adjustment to EU-level reforms.
- Priorities for CESEE and other regions:
  - Labor market regulations that facilitate reallocation;
  - Boosting human capital;
  - Improving growth-friendliness of tax systems;
  - Addressing governance shortcomings where relevant.
- EU-level and cross-border priorities:
  - Deepening the EU single market to reduce intra-EU trade costs (through harmonizing regulations, opening protected sectors, addressing cross-border infrastructure shortcomings).
  - Reducing barriers to worker and capital mobility, including:
    - Addressing pension portability;
    - Pursuing mutual recognition agreements for professional services;
    - Establishing a 28th corporate regime—a voluntary EU-wide corporate and insolvency framework open to all legal business entities to simplify cross-border firm operations.
- Local and place-based policies to manage agglomeration and sharing gains:
  - For expanding hubs: ease constraints on housing construction (for example, by adjusting zoning regulations), provide targeted and temporary housing allowances, and scale up local public services.
  - For receiving regions: invest in infrastructure and education, consider joint grant programs for firms and universities, and design policies to attract talent (for example, address job opportunities for spouses).
  - To share aggregate gains without undermining productivity incentives: use contributions to national and EU budgets that increase with economic activity (for example, via value-added tax collection) and combine place-based support with structural reforms (for example, performance-based budgeting).
  - Maintain social safety nets as a permanent mechanism to provide support irrespective of location.

*International Monetary Fund | Regional Economic Outlook—Europe | November 2025*

### Box 2.1. Sizing up the Scope for Reducing Intra-European Union Trade Barriers

### Box 2.1. Sizing up the Scope for Reducing Intra-European Union Trade Barriers

### Approach and data
- Extended the gravity approach in Adilbish and others (2025) to include the states of the US as individual economies, enabling consistent estimation of gravity determinants across all bilateral pairs (countries or US states).
- Data sources: Organisation for Economic Co-operation and Development’s ICIO database, US Census Commodity Flows Survey, and US Census foreign trade data by state.
- Vintages analyzed: 2007, 2012, 2017, and 2022 (corresponding to Commodity Flows Survey vintages).
- Scope restricted to goods sectors because of the absence of intra-US services data.
- Estimation methods:
  - Panel specification with economy-pair fixed effects to identify changes in trade barriers relative to the first year in the sample, controlling for time-varying bilateral determinants of trade.
  - Alternative specification to estimate levels of trade costs replaces country-pair fixed effects with time-invariant bilateral determinants of trade; this can ascribe to trade costs unmeasured drivers (for example, time-invariant home preferences), so level estimates should be considered an upper bound.
- A common trade elasticity value of 5 is used to compute ad-valorem equivalents.

### Key empirical findings
- Aggregate manufacturing results indicate trade barriers have remained roughly at the same level since 2007 across most economies, including those within the EU.
- The estimated barriers between the US and China are estimated to have increased by about 15 percent (2022 relative to 2007).
- Level estimates (upper bound) for aggregate manufacturing goods:
  - Ad-valorem costs for trade between EU members: about 40 percent (2022).
  - Intra-US estimated costs: about 26 percent in 2022 (and hovering between 21 and 26 percent across vintages).
- Comparison implication: the intra-EU ad-valorem estimate of about 40 percent is significantly lower than the cost of trading between non-EU economies, reflecting successful EU integration, but it is higher than the intra-US estimate and thus points to further scope for intra-EU liberalization.

### Caveats and interpretation
- Level estimates may overstate actionable trade barriers because time-invariant preferences and other unmeasured drivers of trade can be absorbed into estimated trade costs; therefore, reported ad-valorem levels should be interpreted as an upper bound.
- Analysis limited to goods; no intra-US services data were available for inclusion.

### Implication
- The difference between estimated intra-EU ad-valorem costs (about 40 percent) and intra-US costs (about 26 percent) suggests measurable remaining scope for further intra-EU liberalization of goods trade.

*Author: Lorenzo Rotunno. Sources: OECD; US Census; IMF staff calculations.*

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_Source: https://www.imf.org/-/media/files/publications/imf-notes/2025/english/insea2025005.pdf_