Specialization of Production in a Multilateral Free Trade Area with a Continuum of Goods

By applying the framework of Dornbusch, Fischer, and Samuelson (1980) this paper extends the model for bilateral free trade arrangement into a multilateral free trade agreement (MFTA). We examine the determination of the area of specialization and the impact of a newly admitted country on the restructuring of specialization pattern for member countries of the MFTA. When the newly admitted country has already been sufficiently open to the foreign competition, its specialization zone will expand and its GDP will improve relative to the incumbent countries after the entry into the MFTA. However, if this country’s domestic market is too protected from foreign competition, its specialization zone will shrink along with the worsening of its GDP after entering the MFTA. Consequently we argue that the admission into the MFTA is not necessarily a free good. It may bring in a great amount of job losses in the short run due to the shrinkage of the specialization zone from the sharpened competition in the MFTA environment.