Brief Overview of Related Literature
The exemption of regional trading blocs from GATT rules was based on the conviction that the reduction of barriers to trade associated with the formation of regional integration blocs constitutes a move toward free trade and is consequently welfare improving. Viner (1950), however, showed that this general presumption is not true. Rather than depicting a uniform reduction of barriers to trade, trade liberalization in the course of regional integration is discriminatory. Producers in countries outside the integration bloc will not face lower barriers to trade and their imports into the integration bloc become more expensive relative to those of producers in partner countries. Viner pointed out that the net welfare effect of preferential trading clubs (free trade zones, custom unions) depends on the balance between trade creation and trade diversion.
KeywordsTrade Liberalization Regional Integration Unskilled Labor Factor Endowment Trade Diversion
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- 1.By introducing differentiated products, Ethier/Horn (1982) argue that a consumption gain effect arises. Consumers benefit through a larger available variety of consumption goods.Google Scholar
- 2.For a short survey, see Lloyd (1982).Google Scholar
- 3.He was, however, not the first who developed this type of models. For example, Fujita (1988) and Rivera-Batiz (1988) have used models which have all the properties of general equilibrium approaches of economic geography.Google Scholar
- 4.Krugman/Venables (1995) argue that this monotonicity result stems from the assumption of labour mobility in a regional context. Assuming immobility of labor gives them a non-monotone relation between agglomeration and (international) trade liberalization. Starting from high levels of trade barriers, trade liberalization leads to agglomeration. Eventually, however, continuing reductions in trade barriers lead in their model to a reindustrialization of the periphery.Google Scholar
- 5.A further example of a study in which geography plays a role can be found in Wooton (1988) who analyzes the implications of factor mobility in a common market. This study relies, however, on perfect competition in all markets.Google Scholar
- 6.Puga/Venables (1996) also look at the evolution of industry location in the course of economic development by using a model of economic geography. They leave, however, issues of an endogenous development of the economies under investigation aside.Google Scholar
- 7.Walz (1997a) provides a survey of all aspects of the dynamic effects of economic integration (i.e. regional as well as international integration).Google Scholar
- 8.For the basic model, see Aghion/Howitt (1992) and Grossman/Helpman (1991a).Google Scholar
- 9.The terminology is borrowed from Rivera-Batiz/Romer (1991a).Google Scholar
- 18.This is an old idea in regional economics, see Perroux (1955).Google Scholar