INDUSTRIAL AGGLOMERATION: ASYMMETRY OF REGIONS AND TRADE COSTS

Abstract

This paper investigates the impact of international trade liberalization and regional integration on the distribution of economic activities within countries such as China. We extend Krugman's original New Economic Geography model to account for a two-country, three-region case where the home country is fully asymmetrical in terms of its size and access to global markets. Our simulation results show that the spatial economy of the home country changes in a more complex way than is shown in Krugman's results. When international trade liberalization continues but domestic regions remain poorly integrated, the gate region experiences a change from partial to full agglomeration. When the home country is closed to international trade, the decrease in domestic transport costs makes the hinterland more attractive for manufacturing. However, when it is open to global markets, more manufacturing is undertaken in the gate region.