ECONOMIC-INTEGRATION, MARKET-SIZE AND THE WELFARE EFFECTS OF TRADE LIBERALIZATION

This paper examines the welfare effects of regional and global integra tion in a model where market size matters. Regional integration leads to higher welfare in the countries of a preferential trading arrangeme nt (PTA), but to lower welfare outside. In case the countries also dec ide to form a customs union (CU), both countries will experience furth er gains if the creation of the CU means that the average external tra de barriers are raised. In turn, the outside country will in this case experience further welfare losses. If it retaliates and creates a tra de war, this will lower welfare in all countries. In contrast, global integration mostly benefits both PTA countries and outside countries. JEL no. F12, F13.