ECONOMIC-INTEGRATION AND THE WELFARE OF THOSE WHO ARE LEFT BEHIND - AN INCENTIVE-THEORETIC APPROACH

This paper analyzes the impact of regional integration on outside coun tries as well as member countries, using a simple model with product d ifferentiation and increasing returns to scale. Major findings include : (i) economic integration surely benefits the member countries but de finitely worsens the welfare of the rest of the world even if the inte grating countries do not raise the external tariff rates (i.e., Articl e XXIV of the GATT is not enough to keep the third countries from incu rring a loss); and (ii) incentives emerge for the outside countries to form a countervailing free trade area to compensate for the loss of w elfare due to the formation of the original union. The results shed li ght on the recent development of regionalism, such as EU, NAFTA, EAEC, and APEC. (C) 1998 Academic Press.