Economic integration and market access

Abstract

Traditional analysis of the effect of economic integration on the rest of the world draws unambiguously pessimistic conclusions. Integration causes trade diversion which reduces demand for the rest of the world’s exports, and reduces supply of its imports. The rest of the world’s terms of trade may therefore deteriorate with associated welfare loss. As is widely recognised, this analysis gives an inadequate description of the current phase of European integration. Study of European integration must incorporate imperfect competition, scale economies and intra-industry trade. The implications of these considerations for the effect of economic integration on the rest of the world have been discussed by Corden (1972), Robson (1987), Pelkmans (1984) and, in the context of the effects of 1992 on EFTA, Norman (1989). These considerations raise the possibility that consumers in the rest of the world may benefit from integration; supply side improvements in the integrating economy (for example lower marginal costs if there are increasing returns to scale, or the production of more product varieties) may spill over into rest of the world markets. However, the effects of integration on firms in the rest of the world is again negative they suffer reduced market shares and perhaps lower profits. This is illustrated in Smith and Venables ( 1988). The second way in which current European integration is not adequately described by traditional theory is that the integration process is not the removal of taxes and tariffs, but the alteration of rules and regulations. The process thus has direct effects not only on EC firms, but also on firms from