Comparative Advantage and the Welfare Impact of European Integration

This paper investigates the welfare gains from European trade integration, and the role of comparative advantage in determining the magnitude of those gains. We use a multi-sector Ricardian model implemented on 75 countries, and compare welfare in the 2000s to a counterfactual scenario in which Eastern European countries are closed to trade. For Western European countries, the mean welfare gain from trade integration with Eastern Europe is 0.1%, ranging from zero for Portugal to 0.35% for Austria. Comparative advantage is a key determinant of the variation in these welfare gains: countries whose comparative advantage is most similar to Eastern Europe tend to gain the least, while countries with technology most different from Eastern Europe gain the most.