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Relying on a three-country model of economic geography (one Northern and two Southern countries), this paper analyzes the effects of South-South regional integration on the location of industry inside the area. A comparison between different trading arrangements shows that in the absence of cooperation, a developing country can promote industrialization and improve its welfare by unilateral trade liberalization. However, the benefits of unilateral liberalization seem to hold only in a context where the other developing country maintains unilateral protectionism. When instead there is cooperation among the Southern countries, the customs union seems to be the best option because a South-South liberalization coupled with protection vis-à-vis of the North improves the production structures and welfare levels without asymmetry among the integrating countries. However, while the formation of a customs union area benefits the integrating region as a whole according to the industry size, some member countries may be reluctant to apply a common tariff outside the area from the point of view of welfare. This result, the so-called prisoner’s dilemma, displays difficulties in implementing a customs union. Finally, our paper highlights the costs resulting from no cooperation: by implementing trade protection against each other, the Southern countries would deteriorate their performance both in terms of industrialization and welfare, while accentuating their trade dependence vis-à-vis of the North.Classification JEL: F12, F15, O10, R10