Trade Agreements in a linear FE model

The treaty of Rome was signed in 1957 and it started a continuous process of strengthening the internal integration of the EU. In this study, we consider the economic effects of intensified trade integration within the Union in which productive factors are also mobile. We argue that a New Economic Geography (NEG) perspective is preferable to the Heckscher-Ohlin approach. We show that trade integration leads to specialization, trade creation, and trade diversion (as predicted by a standard Heckscher-Ohlin framework), but it may also lead to agglomeration within the Union, which is typical of a NEG framework. We show that these agglomeration processes reinforce the specialization and trade effects of trade integration. Finally, we provide insights into the dynamic processes and show that the coexistence of attractors in our modeling approach is more pervasive than in a standard NEG framework.