Preferential trade agreements between dissimilar economies are known to encourage inter-industry specialization, but when they take place between developed and developing countries, they also change the nature of intra-industry trade by facilitating cross-border production sharing. When such arrangements liberalize foreign direct investment as well as trade, production is internationalized and component or intra-product trade increases. Using a standard trade model, this paper derives the conditions under which integration of this type improves competitiveness and raises employment, output, and welfare.
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Paper provided by Lowe Institute of Political Economy in its series Working Papers with number
0203.
Find related papers by JEL classification: F11 - International Economics - - Trade - - - Neoclassical Models of Trade F15 - International Economics - - Trade - - - Economic Integration F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business