Economic Integration as Competitive Discipline

This paper reexamines the standard notion that economic integration will promote competition. Using an illustrative model, it is shown that integration will indeed enhance competition if the foreign firm is the low-cost producer. But if the foreign firm is the high-cost producer, integration will retard competition if the initial tariff level is low. The results of this paper suggest that trade liberalization does not always provide competitive discipline. Competition policy must still be actively enforced even when economies are becoming increasingly open.