Preferential trading arrangements and industrial location

This paper considers the locational effects of geographically discriminatory trade policy. A preferential move towards a free trade area pulls industry into the integrating countries. Input-output links between imperfectly competitive firms amplify this effect and, when trade barriers fall below some critical level, may lead to agglomeration with some member countries gaining industry at the expense of others. A hub-andspoke arrangement favours location in the hub, with better reciprocal access to spoke nations than these have to each other. Further liberalisation induces agglomeration in the hub and may trigger disparities between the spokes. * This paper was produced as part of the Programme on International Economic Performance at the UK Economic and Social Research Council funded Centre for Economic Performance, London School of Economics. Financial support from the Banco de España (Puga) and the British Taiwan Cultural Institute (Venables) is gratefully acknowledged.