Trading Blocs and Welfare : How Trading Bloc Members are Affected by New Entrants

This paper uses the three-country duopoly model to examine the effects of lowered trade barriers when a new entrant joins a trading bloc. There are two firms a small-country firm and a large-country firm within the bloc and three markets two within and one (new entrant`s) outside the bloc. The analysis generally shows greater gains for the small-country than for the large-country firm. The small-country firm will export more to the external country than the large-country firm. But if tariffs decline, the export share of the large-country firm will increase relative to the small-country firm`s, though profits will improve more for the latter