The Linder effect in trade blocks

Abstract

Linder's theory, which states that industrialized countries import the same kinds of goods as they export, has been tested with different degrees of success. In this article its performance is investigated within the context of the formation of the EEC trade block. The formation of trade blocks involves trade diversion effects. Here these effects are combined with the ones implied by Linder's theory. Our results show that the trade diversion effects are strongest for the (European) countries with per capita incomes close to the European average. Non-EEC countries with per capita incomes close to the European average income face the highest negative trade diversion effects, while the EEC countries with an average income face the highest positive trade diversion.