Working Paper: CEPR ID: DP1435
Authors: Marius Brulhart; Johan Torstensson
Abstract: This paper analyses the effects of regional integration on the location of increasing-returns industry and the resulting pattern of trade. Theoretically, it is shown that regional integration may initially lead to a dispersion of industry inside the customs union. Below a certain threshold of internal trade costs, however, industry concentration in the central member country will again increase. This non-monotonic relationship with regional integration also applies to equilibrium levels of intra-industry trade (IIT). A strictly monotonic negative relationship is found between, on one hand, the degree of scale economies and, on the other hand, industrial concentration both in the central country and intra-union IIT. Empirical evidence for the European Union lends support to some of the theoretical predictions. Employment in scale-intensive industries tends to be concentrated at the centre of the EU, and IIT is relatively low in these sectors. An IIT growth reversal is detected for the scale-intensive industries, which supports the non-monotonicity predicted by the model.
Keywords: regional integration; economic geography; European Union; scale economies
JEL Codes: F12; F15; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regional integration (F15) | non-monotonic relationship between intra-union trade costs and industrial concentration (F12) |
| Reduction in intra-union trade costs (F15) | increased dispersion of production (L23) |
| Reduction in intra-union trade costs (F15) | increased concentration of production (E23) |
| Scale economies (F12) | industrial concentration (L69) |
| Higher degrees of scale economies (F12) | increased likelihood of concentration in central regions (R11) |
| Employment in scale-intensive industries (L16) | concentrated in the center of the EU (O52) |
| Growth reversal in intra-industry trade (F14) | aligns with theoretical predictions of non-monotonicity (D79) |