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Economists generally pay little attention to the effects of liberal trade policies on the internal geography of countries. This paper presents a fully operational interstate CGE model implemented for the Brazilian economy that examines how the distribution of the economic activity may change as the country opens up to foreign trade. Among the distinctive features embedded in the model, modeling of scale economies, port efficiency and land-maritime transport costs provides an innovative way of dealing explicitly with theoretical issues related to integrated regional systems. In order to illustrate the role played by the quality of infrastructure and geography on the country's foreign and interregional trade performance, a set of simulations are presented where import barriers are significantly reduced. The relative importance of import tariffs, port efficiency and maritime transport costs for the country trade relations and regional growth is then detailed and quantified. A final set of simulations shed some light on the spatial effects of scale economies, where the manufacturing sector in the state of São Paulo, taken as the core of industrial activity in the country, is subjected to different levels of increasing returns to scale at the firm level. Core- periphery effects are then traced out suggesting the prevalence of agglomeration forces over diversion forces could rather exacerbate regional inequality as import barriers are removed up to a certain level. Further removals can reverse this balance in favor of diversion forces, implying de-concentration of economic activity as the country opens up to foreign trade, a result quite in line with recent advances in NEG models.

On The Effects of Scale Economies and Import Barriers on Brazilian Trade Performance and Growth : An Interstate CGE Analysis