If economies of scale imply that firms located in large countries enjoy lower costs, then gains of trade bloc enlargement will fall disproportionately on firms in small countries. In Discussion Paper No. 1320, Research Fellow Alessandra Casella discusses this theoretical prediction and tests it by looking at the impact of the 1986 entry of the `small countries' Spain and Portugal into the European Community. The data show that, after 1986, exports from France and the UK did indeed lose market shares in Spain and Portugal, relative to exports from the small Community countries. For the case of Italy and - less clearly - for Germany, the theoretical prediction is rejected, however.

Casella makes three observations: First, the anomalous pattern of Italian exports may be related to the specific measures accompanying Spain's and Portugal's entry in the EC. Second, the sample is too short to allow any study of the impact of German unification on German exports, and assuming - as is implicitly done in this paper - that this dramatic structural change is completely captured by GDP and real exchange rates, is problematic. Third, it seems that more substantial changes in the size of a trade bloc than the 1986 integration of Spain and Portugal would have effects that are easier to detect empirically.

Large Countries, Small Countries and the Enlargement of Trade Blocs
Alessandra Casella