in progress) Trade liberalisation and agglomeration with firm heterogeneity

This paper studies the impact of trade costs reduction on geographical manufacturing concentration in the presence of intermediate inputs linkage, firm heterogeneity and export fixed costs. Firm heterogeneity with export fixed costs hampers full agglomeration through weakening forward and backward linkages and fortifying market crowding effects. Rather than catastrophic agglomeration that the standard new economic geography models such as the Core-Periphery Model of Krugman (1991) have long suggested, trade liberalisation causes gradual agglomeration. Also, trade liberalisation produces a divergence in welfare for the periphery, which loses, and the core, which gains. Even free trade never equalises welfare between core and periphery, i.e. trade liberalisation does not eliminate inequality among nations due to the fact that the periphery’s needs cannot all be sourced from the core. JEL F15, F23