Regional Integration and its Spatial Effects within a Member Country

This paper studies the impact of regional integration on the economic geography of an interior region, for instance a member country. It extends a simple new economic geography model in which differentiated goods can be exchanged both nationally and internationally but at different positive costs. Both types of costs affect agglomeration and dispersion forces; as a consequence, regional integration modifies the incentive for firms to spatially concentrate. The results obtained suggest that heterogeneity between domestic locations, in terms of access to the preferential partner and in terms of market size play a major role in shaping industrial location inside the member country. If two domestic locations are equidistant from the preferential partner, regional integration tends to foster spatial concentration in the biggest location. When one of the regions has an advantage in terms of access to the partner's market, preferential trade liberalisation generally favours it, unless competition from abroad is too high.