Economic Integration and the Welfare of Those Who are Left Behind: an Incentive-Theoretic Approach.

This paper analyzes the impact of regional integration on outside countries as well as member countries, using a simple model with product differentiation and increasing returns to scale. Major findings include: (I) economic integration surely benefits the member contries but definitely worsens the welfare of the rest of the world event if the integrating countries do not raise the external tariff rates; and (II) incentives emerge for the outside countries to form a contervailing free trade area to compensate for the loss of welfare due to the formation of the original union.