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Abstract

This paper investigates the effects of subnational regionalization on a country’s terms of trade, trade patterns, and its welfare. We show that a countrycan gain from dividing itself into two regions with different factor ratios. Making a region in a countryto have a comparative advantage different from the country as a whole cangenerate a welfare improving terms-of-trade effect. We also show that subnational regionalization can reduce thevolume of trade and or even reverse countries’ trade patterns. This explains theparadox between trade patterns predicted by the standard Heckscher-Ohlin model and those found empirically.