A U-shaped Europe? A simulation study of industrial location

We use a large-scale CGE-model to simulate the effects of gradual economic integration on the location of industrial production. Our results reveal large differences among industries, Industries with high scale elasticities typically display a non-monotonous relationship between trade liberalisation and concentration, with maximum concentration for intermediate trade costs. Other industries, more driven by comparative advantage, become monotonously more concentrated as trade costs fall. On the aggregate level we find an (inverted) U-shaped relation between trade costs and concentration. The results also show a close correlation between real income gains and growth in manufacturing production, stemming from pecuniary externalities in the manufacturing sectors. (C) 2002 Elsevier Science BV All rights reserved.