This dissenmion looks at increasing trade ilUegrorionjrom three angles: FirSl, what are welfare implications of trade integrmion and trading blocks? Second, what mechanism can improve the sustoinabiliry oj trade integration? Third, whO! relationship evolved between trade and foreign direct investment? Chapter I starts by questioning Krugman's (1993) trading block modeJ, which suggested that world trade is increasingly conducted between three trading blocks, which produces a minimum in world welfare. His symmetrical trading block model is extended into a two-sector model, where trade is not only beneficial through increased varieties in a Dixit-Stiglitz framework, but also through comparative advantage. Results show that: (i) regionalism and multilateral ism can be compatible and welfare enhancing; (ii) sequential integration can monotonously increase world welfare; (iii) more dissimilar countries have higher potential benefits from integration; (iv) about one third of potential gains from free-trade under average tariffs are already realized in a system of three trading blocks. Chapter II studies the political sustainability of trade integration. The previous trading-block-model is combined with a political pressure group model, where domestic interest groups lobby their government to proceed with sequential trade integration. Theory shows that trade integration is politically not sustainable viii Pre/(lct when consumers' and producers' interests are opposed, unless a mechanism is designed which links sequential trade integration with factor reallocation and which worsens the best alternative to integration.
Table of ContentsI: Regionalism and Multilateralism: How Are They Compatible? A Symmetrical Two-sector Trading Block Model.- Abstract.- 1. Introduction.- 2. A Look at Trade Data: More Regionalism and More Welfare.- 3. Krugman’s Trading Block Model.- 4. Two-sector Trading Block Model with Comparative Advantage.- 5. A Brief Critique, Conclusions, and Outlook.- 6. References.- 7. Appendix-I: Two-Sector Closed Economy Model.- 8. Appendix-II: Two-Sector Open Economy Model.- 9. Figures.- II: Political Economy of Trade Integration A Mechanism of Central European Integration.- Abstract.- 1. Introduction.- 2. A Pressure Group Model of Trade Policy.- 3. Simulations with a Modified Trading Block Model.- 4. The Central European Demand for Integration.- 5. The European Union’s Supply of Integration.- 6. Conclusions.- 7. References.- 8. Appendix-I: Objective Functions for Consumers and Producers.- III: FDI: The Neglected Twin of Trade A Substitute or a Complement?.- Abstract.- 1. Introduction.- 2. FDI and Trade as Vehicles of Global Integration.- 3. FDI and the Theory of Multinational Firms.- 4. Data Material.- 5. A Gravity Model of International Trade and FDI.- 6. Pitfalls of the Gravity Model.- 7. Macroeconomic Considerations.- 8. Conclusions.- 9. References.- 10. Appendix 1: FDI Effects on Trade in a Three-Country-World.- 11. Appendix 2a/b/c: Gravity Model of International Trade - Basic Model.- 12. Appendix 3a/b/c: Gravity Model of International Trade - Ext. Model.- 13. Appendix 3d: Gravity Model of International Trade - Notes.