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Eclectic Paradigm.., Business Management

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‘It should be obvious that simply the signing of a treaty to remove barriers to trade does not have any effect on the intra-group trade if the prospective partners do not demand each others’ exports. In this context, the only effect of regional integration would be indirect and related to the new level of protection of the group towards the outside world compared to the level of protection in each country prior to integration. Disregarding this effect and abstracting from intra-industry trade, in a two-good model, trade integration will have the usual trade creation/trade diversion effects when the prospective partners each have comparative advantage in the production and export of a different good while both goods are consumed by all countries. In other words, the difference in partners’ factor endowments makes them natural trading partners’. Discuss.

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