We empirically evaluate the aggregate welfare effects and structural adjustment for the Spanish economy that would follow from trade liberalization with the European Economic Community. Recent theory suggests that the classical gains form more liberal trade relations could be amplified substantially if EEC liberalization permits Spanish industries to realize economies of scale. These effects depend upon the extent of trade creation and trade diversion resulting from preferential liberalization, which in turn depend on the existing patterns of Spanish resource allocation, trade, and comparative advantage. The estimated results are derived from disaggregated microeconomic model of the Spanish economy. We find that increasing returns can actually be beneficial or detrimental, depending upon the interactions between trade and policy toward domestic industry. © 1995 Physica-Verlag.