  Can trade integration induce product innovation? I document that countries
that joined the European Union (EU) started producing more product varieties,
investing more in R&D, and trading more compared to candidate countries that
did not join at a given horizon. Additionally, I show that a plausibly
exogenous increase in market access increases the probability of a given
country starting production of and exporting a given product. To rationalize
this reduced-form evidence, I propose a new quantitative framework that
integrates the forces of specialization and market size. This is a dynamic
general equilibrium model of frictional trade and endogenous growth with
arbitrarily many asymmetric countries that nests the Eaton-Kortum model of
trade and the Romer growth model as special cases. The key result is an
analytical expression to decompose gains from trade into dynamic and static
components. In this framework, the product innovation growth rate increases
with higher market access. Finally, a quantitative version of the model
suggests that: (a) the EU enlargement increased its long-run yearly growth rate
by about 0.10pp; and (b) dynamic gains can account for between 65-90% of total
welfare gains from trade.
