ABSTRACT
The traditional (static) model of preferential trading areas considered the effect of a reduction in tariffs on welfare. It concluded that the elimination or lowering of tariffs increased competition which, in turn, could lead to an improvement in welfare. The new theory focuses on the dynamic effects of integration. In the case of perfect competition, a narrow range of outcomes is clear. However, in the situation of imperfect competition and multiple equilibria, many outcomes can take place. With economies of scale and imperfect competition, there are no unconditional expectations that all countries will gain from integration, even less that they will gain equally. In the absence of adjustment policies, such as industrial, regional and social policies, integration may impose costs on some countries, rather than give them benefits. Therefore, cooperation among countries regarding the distribution of gains and losses is a necessary condition for successful integration. In any case, integration alters the geography of production in participating countries, which must modify, and even abandon, the established domestic monopolies and autarkic traditions.
