We analyse the deep and comprehensive free trade area (DCFTA) between Ukraine and the EU using a multi-regional general-equilibrium
simulation model. Three alternative trade structures are implemented: 1. a standard specification of perfect competition based
on the Armington assumption of regionally differentiated goods; 2. monopolistic competition among symmetric manufacturing
firms; and 3. a competitive selection model of heterogeneous manufacturing firms. Across these structures the DCFTA indicates
relatively large gains for Ukraine of more than 3 percent. We show, however, that the gains for Ukraine are lower when we
consider monopolistic competition in manufacturing. This is attributed to a movement of resources into Ukraine's traditional
export sectors to the EU, which produce under constant returns. While there is little danger of deindustrialisation dominating
the overall welfare gains, we do observe substantially lower gains when we consider monopolistic competition. To our knowledge,
this is the first empirical confirmation of the theoretic predication that the relative gains from trade in monopolistic competition
models might be lower than under perfect competition in the context of a numeric simulation of economic integration. Under
the popular heterogeneous-firms monopolistic competition theory we find significant firm selection effects indicating welfare
impacts for Ukraine that are less than under the Armington structure but above those found under symmetric firms and monopolistic
competition. These results are important considerations for Ukraine's overall development strategy.
JEL-Codes:F12 C68 O12 O14
Keywords:DCFTA, Ukraine, EU, Armington, New trade theory, Krugman, Melitz
Forschungsbereich:Industrie-, Innovations- und internationale Ökonomie