Trade liberalisation and growth: market access advantage

Abstract

This paper analyses the effect of integration on growth when countries have different preferences. It describes a two-country two-sector model, with the first sector producing the homogeneous good and the second sector producing a differentiated good, which is divided in a first-class goods group and a second-class group. The only innovative sector is the one producing first-class goods. In autarchy, both countries produce first and second-class goods. Opening up to trade, with non-zero transport costs, induces countries' specialisation according to their home-market comparative advantage. In these circumstances, transportation costs affect the growth rate. There are three main findings. First, integration has a positive effect on growth, but there is a discontinuity at free trade. Second, integration with a country with a smaller market for the innovative good may increase growth more than integration with a country with symmetric preferences. Finally, the effect of integration on growth is higher the larger the size of the home market advantage and the smaller is the extent of spillovers between countries. <br><br> Keywords; home market comparative advantage, integration, intra-industry trade, endogenous growth