LARGE COUNTRIES, SMALL COUNTRIES AND THE ENLARGEMENT OF TRADE BLOCS

Are there systematic forces such that countries of different sizes par ticipating in a free trade bloc benefit differently from the entry of new members? If economies of scale imply that firms located in large c ountries enjoy lower costs, then the gains from enlarging the bloc wil l fall disproportionately on small countries, because the entrance of new members diminishes the importance of the domestic market and impro ves the small countries' relative competitiveness. The theoretical pre diction is clear, but the empirical analysis of trade flows towards Sp ain and Portugal after their 1986 entry into the European Community yi elds mixed results. France and the U.K. appear to have lost market sha res relative to the small countries in the Community, but the same is not true for Italy and, to a lesser degree, for Germany.