Global Production Effects of European Integration

This paper presents a computable general equilibrium model of world trade, and applies the model to analyses of world trade and production effects of European integration. The main features of the model are: four world regions, twelve traded goods, one non-tradable aggregate in each region and three non-traded factors of production in each region. Eleven of the traded goods industries are imperfectly competitive, with differentiated products and increasing returns to scale. The model is calibrated to 1985 data, assuming that markets are segmented at the outset. Model experiments of reduced trade costs and fully integrated markets within the EC as well as between the EC and EFTA are presented. All the simulations indicate that whereas the effects for Europe and in particular the EFTA countries may be substantial, the rest of the world has little to fear from a more integrated Europe. The effects for Europe come in terms of welfare gains and structural changes towards more skill-intensive production.