DP1309 Preferential Trading Arrangements and Industrial Location

Author(s): Diego Puga, Anthony J Venables
Publication Date: December 1995
Keyword(s): Agglomeration, Customs Union, Hub-and-spoke, Integration
JEL(s): F12, F15, R12
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1309

This paper considers the location effects of geographically-discriminatory trade policy. A preferential move towards a customs union attracts industry to the integrating countries. When internal barriers fall below some critical level, input-output links between imperfectly competitive firms lead some customs union countries to gain industry at the expense of others. Closer integration can bring converging industrial development to the union. A hub-and-spoke arrangement favours location in the hub, with better reciprocal access to spoke nations than to each other. Further liberalization induces agglomeration in the hub and may trigger disparities between the spokes.