Trade openness, transport networks and the spatial location of economic activity

Abstract

This paper introduces a multi-country multi-regional model that allows the evaluation of the effects of trade openness in the distribution of economic activity across regions within countries. Relying on the agglomeration and dispersion forces characterizing the analytical framework of the New Economic Geography and New Trade Theory (neg/ntt) literature, we consider a general model with two differentiated sectors in terms of preferences, technologies and transport costs, allowing for any feasible world trade network topology where trade frictions are both transport and non-transport related (tariffs). We study systematically the critical thresholds that characterize the long run equilibria of economic activity. As benchmark simulations we choose two opposed domestic network topologies characterizing a homogeneous space and a heterogeneous space with some regions enjoying locational advantages. Our findings show that trade openness changes locational patterns in favor of better located regions with respect to the new world topology, which nevertheless may result in larger or lower spatial equality depending on the initial distribution of the economic activity. These results entail important implications in terms of transport infrastructure (accessibility) and trade (commercial agreements) policies, as both are interrelated when policy makers set regional equality goals.