EU Integration and Outsiders a Simulation Study of Industrial Location

Abstract

This paper focuses on the location effects of preferential trade areas (PTA) on non-members. More specifically, using a CGE model calibrated to real data, it focuses on the impact of tighter European integration on outsider regions. We argue that because theoretical models analysing PTAs have very few contact points with reality, further research is needed to evaluate whether the effects highlighted by these models — catastrophic agglomeration and non-monotonic relocation, for example — are theoretical aberrations of highly specific models, or important effects that help us explain real world events. In our 14-sector, 10-region model, we find broad confirmation for the theoretical PTA models, and in particular for the Puga-Venables effects. We find that tighter European integration has a significant impact on Central and Eastern European countries, but the the impact on the other regions of the world is rather small. Our findings do however, suggest that the simple models of economic geography analysing PTAs miss important elements. The most important of these are comparative advantage and real trade costs.