DP1656 | Regional Integration, Trade, and Migration: Are Demand Linkages Relevant in Europe?

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We examine the consequences of increased economic integration between nations within a region. We adopt Krugman?s economic-geography model in which demand linkages can generate agglomeration of manufacturing activity. Manufacturing labour is assumed to be imperfectly mobile between countries. This constrains the forces of agglomeration within the region and suggests that the model may be applicable to Europe. We show that trade liberalisation may lead initially to partial agglomeration, then a re-industrialisation of the periphery. This argues in favour of a sequential approach to integration, with trade barriers being eliminated prior to a reduction in impediments to factor mobility.