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| Takumi Naito |
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| ''Trade diversion is reversed in the long run'' |
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| We explore the role of economic growth as a cause of reverse trade diversion in an asymmetric three-country Melitz model. A regional trade agreement between countries 1 and 2 decreases country 3's growth rate and the revenue shares of varieties country 3 exports to countries 1 and 2 in the short run, but increases them in the long run, compared with the old balanced growth path. This is because faster short-run growth in countries 1 and 2 than country 3 starts to increase the members' market entry costs more than the nonmember, thereby making the latter relatively more competitive. |
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| Keywords: |
JEL: F1 - Trade: General
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| Manuscript Received : Aug 09 2018 | | Manuscript Accepted : Aug 24 2018 |
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