Hub and spoke bilateralism and the global income distribution

Stibora, Joachim and de Vaal, Albert (2006) Hub and spoke bilateralism and the global income distribution. (Discussion Paper) Kingston upon Thames, U.K. : Faculty of Arts and Social Sciences, Kingston University. 21 p. (Economics Discussion Paper)

Abstract

We study the effects of hub and spoke liberalization in a model where income matters for consumption patterns. We use a three-country Ricardian trade model in which goods are ranked according to priority and where economies differ in their income level. The poorest (richest) country has a comparative advantage in the production of lowest-ranked (highest-ranked) goods, specializing in goods with low (high) income elasticities in demand. The medium rich country specializes in the production of the intermediate-ranked commodities. We find that a country’s income level is of decisive importance for assessing the impact of hub and spoke arrangements on welfare. Hubs do not necessarily gain and spokes do not necessarily lose.

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