There is considerable concern about how European integration will affect its poorer regions, accentuated by Greece, Spain and Portugal joining the EC. Integration should allow these economies to exploit their comparative advantage in labour costs, but it is also possible that they will be unable to compete with industries located nearer bigger markets. In Discussion Paper No. 363, Research Fellows Paul Krugman and Anthony Venables investigate trade liberal- ization in a model of a large and a small country, where the latter is labour-abundant and manufacturing is imperfectly competitive in both. They find a strong force for concentration in the central region, near the large market. When trade barriers are neither very high (when there is little trade) nor very low (when trade is free), market access may be a more powerful determinant of net trade flows than factor endowments. The peripheral economy then becomes a net importer of manufactures, and the direction of net trade is the opposite of that predicted by factor endowments.
A fuller summary of this paper may be found in the conference report on page 4 of this Bulletin.

Integration and the Competitiveness of Peripheral Industry
Paul R Krugman and Anthony J Venables

Discussion Paper No. 363, January 1990 (IT)