ABSTRACT
The classical theory of international economic integration (customs unions) assumed that the static effects of resource reallocation occurred in a timeless framework. If one wants to move this theory towards reality, one must consider dynamic, i.e. restructuring, effects. These restructuring effects have often a spatial dimension. It is generally accepted that markets are imperfect. Externalities such as economies of scale and product differentiation (goods are very close, but not perfect substitutes for each other) introduce imperfections in competition in the market. When a market has such a structure, regionalism/integration may find its justification. The rationale is that integration extends the market, hence there are potentials for the reduction in the market power of firms. This can have a positive impact on competition, productivity and innovation, reduce prices and, hence, increase welfare on average.
