Trade Liberalisation and Growth: Market Access Advantage

This paper analyses the e¤ect of integration on growth when countries have di¤erent preferences. It describes a two-country two-sector model, with the …rst sector producing the homogeneous good and the second sector producing a di¤erentiated good, which is divided in a …rst-class goods group and a second-class group. The only innovative sector is the one producing …rst-class goods. In autarchy, both countries produce …rst and second-class goods. Opening up to trade, with non-zero transport costs, induces countries ’ specialisation ac-cording to their home-market comparative advantage. In these circumstances, transportation costs a¤ect the growth rate. There are three main …ndings. First, integration has a positive e¤ect on growth, but there is a discontinuity at free trade. Second, integration with a country with a smaller market for the innovative good may increase growth more than integration with a country with symmetric preferences. Finally, the e¤ect of integration on growth is higher the larger the size of the home market advantage and the smaller is the extent of spillovers between countries