Competition, Spatial Location of Economic Activity and Financial Issues
Edited by Miroslav N. Jovanović
Chapter 6: Market Integration: Trade versus Economic Geography
Joe Tharakan and Jacques-François Thisse* 1 INTRODUCTION The gradual move towards globalisation is not just the result of trade agreements among nations that lower their tariff barriers. It is also the outcome of a wider process in which various types of trade and mobility costs have substantially decreased thanks to the transport revolution initiated in the nineteenth century and the development of new information technologies such as the telegraph and the internet. To have a detailed picture of the possible impacts of globalisation it is, therefore, important to understand the different facets of the effects of economic integration. Our objective being to understand how, in a world characterised by an increasing opening-up of economies, nations are affected by the mobility of goods as well as by that of production factors, we survey how the related fields of international trade and economic geography analyse the effects of market integration on the international stage. There is a clear distinction between these two fields. Whereas international trade theory places the emphasis on the exchange of goods, while assuming that production factors are immobile, economic geography explicitly accounts for the mobility of factors. To put it another way, the locations of firms and workers become endogenous, whereas traditional trade theory considers them to be exogenous. To start with, there is the question of how big are trade costs? The two opposite views can be summarised as follows. For Deardorff (1984, p. 470) ‘transport costs are almost universally ignored in trade models in the...
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