The Location Effects of Isolation

Often countries that are left outside a discriminatory trade agreement are concerned that firms in "sensitive" sectors might move out of their borders to relocate their plants to the countries signing the agreement. From the point of view of recent developments in trade theory, this paper assesses to what extent such fears are grounded. "Derealization" is indeed a threat for discriminated countries but it is not necessarily welfare reducing once long-run growth effects are taken into account.