Large Countries, Small Countries, and the Enlargement of Trade Blocs
Are there systematic forces such that countries of different sizes participating in a free trade bloc gain differently from the entry of new members? If economies of scale imply that firms located in large countries enjoy lower costs, then the gains from enlarging the bloc will fall disproportionately on small countries, because the entry of new members diminishes the importance of the domestic market and improves the small countries' relative competitiveness. The theoretical prediction is clear, but the empirical analysis of trade flows towards Spain and Portugal after their 1986 entry into the European Community yields mixed results. France and the U.K. appear to have lost market shares relative to the small countries in the Community, but the same is not true for Italy and, to a lesser degree, for Germany.