Final Activity Report Summary - ASYMECOGEO2 (Asymmetries in the economic geography of the European Union)
The project "Asymmetries in the Economic Geography of the European Union" intends to investigate several aspects of the spatial distribution of economic activity that are relevant from an EU perspective. More precisely, the project analyses economic mechanisms and their spatial impacts along three broad axes: (i) how various forms of taxation and subsidies affect the location of production and welfare; (ii) what the role of geographical asymmetries and of the transport sector in shaping industry location are; and (iii) it sets out to develop, to estimate and to simulate economic models dealing with industry location, trade, and productivity and an increasingly integrated world.
In the first axis, the project develops several models that deal with the impacts of commodity taxes (like the VAT) and government subsidies on industry structure and location. One key finding is that federations like the EU face a trade-off when choosing how commodity taxes should be levied: they can be levied on a production basis, which leads to lower tax revenues yet a more even spatial distribution of economic activity; or they can be levied on a consumption basis, which leads to higher tax revenues but a more pronounced spatial polarisation. Hence, federations face a non-trivial trade-off between tax revenue and spatial inequalities, which may conflict with either budgetary constraints or the regional cohesion objective. Turning to subsidy competition between governments, the key contribution of the project is to show that the presence of multinational firms actually reduces the extent to which national governments can engage in harmful subsidy competition. This finding provides some rationale for the well-documented empirical fact that corporate tax competition just does not seem to be much of an issue for many developed countries.
In the second axis, the project develops several analytical frameworks that allow investigating how changes in transport costs and tariff barriers influence the spatial distribution of firms across both countries and regions. In so doing, we pay particular attention to the transport sector, in which imperfect competition and density economies (per unit cost savings related to the volume of shipments) are well-documented facts. A first key contribution is to show that changes in international trade costs and in interregional transport costs have distinct impacts on firm location. Thus, any assessment on how an increasing international and interregional integration affects the distribution of economic activity needs to investigate in depth the relative change in those two trade frictions. Second, we revisit the claim that the deregulation of the transport sector is always unambiguously good for consumers by developing a framework that takes into account the spatial changes induced by falling freight rates. Quite surprisingly, the short-run benefits may map into long-run losses as more undesirable agglomeration of economic activity into a few core regions occurs at the expense of a largely de-industrialised periphery. This result strongly suggests that a short-run perspective on transport deregulation may well miss the larger part of the story.
Last, in the third axis, we develop computational models of economic geography to investigate whether and how market size matters for the location of industry. Drawing on international trade data, we present a framework that offers clear theoretical predictions, and we show using this data that market size is indeed a strong locational determinant in several manufacturing industries. Building on that same framework, we also take a detailed look at how improvements in infrastructure will shift firms across locations, and what the associated changes in welfare are. The key finding is to show that there cannot be any consensus across governments as to which investment to undertake, except for the special case of transportation bottlenecks the improvement of which benefits all trading partners. We finally also develop a few new frameworks in which we take into account the fact that trade liberalisation and transport improvements lead to a "Darwinian survival of the fittest" by selecting only the most efficient firms into export markets. Building on these heterogeneous firms models, we show that there are substantial yet strongly varying regional productivity gains to be expected from a removal of various border barriers. Furthermore, the increasing harmonisation of European legal systems and commercial practices are also shown to lead to quite significant productivity gains in the short- and medium-run.
In the first axis, the project develops several models that deal with the impacts of commodity taxes (like the VAT) and government subsidies on industry structure and location. One key finding is that federations like the EU face a trade-off when choosing how commodity taxes should be levied: they can be levied on a production basis, which leads to lower tax revenues yet a more even spatial distribution of economic activity; or they can be levied on a consumption basis, which leads to higher tax revenues but a more pronounced spatial polarisation. Hence, federations face a non-trivial trade-off between tax revenue and spatial inequalities, which may conflict with either budgetary constraints or the regional cohesion objective. Turning to subsidy competition between governments, the key contribution of the project is to show that the presence of multinational firms actually reduces the extent to which national governments can engage in harmful subsidy competition. This finding provides some rationale for the well-documented empirical fact that corporate tax competition just does not seem to be much of an issue for many developed countries.
In the second axis, the project develops several analytical frameworks that allow investigating how changes in transport costs and tariff barriers influence the spatial distribution of firms across both countries and regions. In so doing, we pay particular attention to the transport sector, in which imperfect competition and density economies (per unit cost savings related to the volume of shipments) are well-documented facts. A first key contribution is to show that changes in international trade costs and in interregional transport costs have distinct impacts on firm location. Thus, any assessment on how an increasing international and interregional integration affects the distribution of economic activity needs to investigate in depth the relative change in those two trade frictions. Second, we revisit the claim that the deregulation of the transport sector is always unambiguously good for consumers by developing a framework that takes into account the spatial changes induced by falling freight rates. Quite surprisingly, the short-run benefits may map into long-run losses as more undesirable agglomeration of economic activity into a few core regions occurs at the expense of a largely de-industrialised periphery. This result strongly suggests that a short-run perspective on transport deregulation may well miss the larger part of the story.
Last, in the third axis, we develop computational models of economic geography to investigate whether and how market size matters for the location of industry. Drawing on international trade data, we present a framework that offers clear theoretical predictions, and we show using this data that market size is indeed a strong locational determinant in several manufacturing industries. Building on that same framework, we also take a detailed look at how improvements in infrastructure will shift firms across locations, and what the associated changes in welfare are. The key finding is to show that there cannot be any consensus across governments as to which investment to undertake, except for the special case of transportation bottlenecks the improvement of which benefits all trading partners. We finally also develop a few new frameworks in which we take into account the fact that trade liberalisation and transport improvements lead to a "Darwinian survival of the fittest" by selecting only the most efficient firms into export markets. Building on these heterogeneous firms models, we show that there are substantial yet strongly varying regional productivity gains to be expected from a removal of various border barriers. Furthermore, the increasing harmonisation of European legal systems and commercial practices are also shown to lead to quite significant productivity gains in the short- and medium-run.