EULOC21.doc 18-10-99 A U-shaped Europe? A simulation study of industrial location*.

First draft This paper uses a full-scale CGE-model- calibrated on 1992 data- to investigate the effects of European integration on the location of industrial production. Our results reveal large differences among individual industries. Industries with high scale elasticities typically display a non-monotonous relationship between trade liberalisation and concentration, with maximal concentration for intermediate trade costs. Other industries, more driven by comparative advantage, become more and more concentrated as trade costs are lowered. On the aggregate European level we find and (inverse) U-shaped relation between trade costs and concentration, with Europe 1992 close to the peak of concentration. The results also show a close correlation between real income gains and growth in manufacturing production; we label this an “externality shifting ” effect – gains from pecuniary externalities in the manufacturing sectors. Finally, we note that nominal factor prices co-vary as regions specialise, while in relative terms there are traces of the Stolper-Samelson theorem