`1992': Trade and Welfare; A General Equilibrium Model

This paper investigates the consequences of the completion of the internal market in the EC using a computable general equilibrium model of trade under imperfect competition. The focus of the paper is the welfare consequences of reducing trade barriers and the changes in production and trade flows with the rest of the world. Welfare changes by country are reported and these are decomposed by source of gain. Two sets of results are reported: a `segmented market' experiment where trade costs are reduced by an amount equal to 2.5% of the value of trade, and an `integrated market' experiment in which there is the same trade cost reduction plus a switch from a segmented to an integrated market equilibrium. In both cases we find large welfare effects arising from imperfect competition. Intra-EC trade liberalization has pro-competitive effects which make a substantial contribution to the welfare change in the first set of experiments and are the most important component of the welfare change in the second set.