Working Paper: CEPR ID: DP1320
Authors: Alessandra Casella
Abstract: Are there systematic forces such that countries of different sizes participating in a free trade bloc gain differently from the entry of new members? If economies of scale imply that firms located in large countries enjoy lower costs, then the gains from enlarging the bloc will fall disproportionately on small countries, because the entry of new members diminishes the importance of the domestic market and improves the small countries' relative competitiveness. The theoretical prediction is clear, but the empirical analysis of trade flows towards Spain and Portugal after their 1986 entry into the European Community yields mixed results. France and the United Kingdom appear to have lost market shares relative to the small countries in the Community, but the same is not true for Italy nor, to a lesser degree, for Germany.
Keywords: trade blocs; economic integration; regionalism
JEL Codes: F12; F13; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| enlargement of a trade bloc (F15) | economic benefits for small countries (O54) |
| market size and competitive advantages (L25) | economic benefits for small countries (O54) |
| larger domestic markets (F69) | lower costs for larger countries (F12) |
| diminished importance of domestic markets (F69) | enhanced competitiveness of small countries (O57) |
| entry of Spain and Portugal (F55) | changes in trade flows and market share (F12) |
| changes in trade flows and market share (F12) | relative competitiveness of small countries (O57) |
| entry of Spain and Portugal (F55) | market share loss for France and the UK (N24) |
| entry of Spain and Portugal (F55) | mixed empirical results for Italy and Germany (C59) |