The traditional theory of international economic integration is an elegant and quite convincing academic exercise. Its conclusions are straightforward and offer useful insights into the incentives for and the general consequences of integration. With that in mind, the first objective of this book is to introduce the reader to the area of international economic integration. The other objective, equally important, is to extend the traditional theory of integration by considering market imperfections, an issue put aside in the neo-classical model of integration. Analysis is supplemented by numerous examples from the real world in order to provide support for theoretical statements. A quantitative approach to analysis is kept at the minimum; thus, it is hoped that the book will be readily accessible to a wide audience, just as was the case with the first edition.
A presentation of a general theory of international economic integration is not (yet) possible. This is due primarily to the absence of a generally applicable theory of international trade. The neo-classical trade theory has looked at comparative advantages, hence, the standard theory of regional economic integration has largely been presented in such a framework. A modern theory and policy on trade cannot be separated from competition and industrial policies. New research models identified other determinants of countries’ trade patterns. In a world of imperfect competition, various externalities and economies of scale, there are many reasons for trade, foreign direct investment and integration, even if countries are identical in their factor endowments, size, technologies and tastes. In such a situation, there are a number of second-best choices about economic actions. This book considers both theoretical and practical economic choices linked with international economic integration.
The analysis acknowledges the importance of the traditional, neo-classical theory of trade: countries trade because they are differently endowed with resources, technology and/or tastes. None the less, such a trade model is more appropriate to trade in simple goods such as wheat, wine or textiles, while the new theory is better suited as a theoretical tool for the analysis of trade in goods such as aircraft and pharmaceuticals, as well as services such as marketing. 1 The new theoretical model supplements the traditional one with a novel quality. This is the consideration of market imperfections: in particular, economies of scale, externalities and foreign direct investment. Being inconsistent with perfect competition, increasing returns to scale were left out of the picture in the traditional model. The new model questions the conventional argument that free trade is always an optimal economic strategy. In the case of market imperfections, integration/regionalism can make sense.