A theoretical assessment on the trading arrangements for a small Asian economy with footloose entrepreneur movement toward China

A new economic geography model is used to assess the impacts of trading arrangements on the industrial development of a small economy with footloose entrepreneur movement toward China. With three regions—the small economy, the large economy (China), and the global market—the simulation results show that, to maintain itself as an industrial core, the small economy should pursue a decentralizing trade arrangement, either by significantly lowering its trade costs with the global market, or by serving as a trading hub. Without reducing the small economy’s trade costs with a third region, the trade liberalization between the small and the large economy will cause the core–periphery effect, even if labor costs rise in the large economy.