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The customs union issue: Why do we observe so few of them?

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  • Facchini, Giovanni
  • Silva, Peri
  • Willmann, Gerald

Abstract

The number of preferential trade agreements has greatly increased over the past two decades, yet most existing arrangements take the form of free trade areas, and less than 10% can be considered to be fully fledged customs unions. This paper develops a political economy model of trade policy under imperfect competition to provide a positive explanation for the prevalence of free trade areas. In a three‐country setting, a representative from each prospective member is elected to determine the tariffs to be applied on imported goods. Under a customs union, the necessity to coordinate tariffs leads voters to strategically delegate power to more protectionist representatives. We show that strategic delegation may imply that free trade areas increase the prospective member countries' welfare compared to customs unions. Moreover, the model also indicates conditions under which free trade areas are more likely to be politically viable than customs unions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 90 (2013)
Issue (Month): 1 ()
Pages: 136-147

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Handle: RePEc:eee:inecon:v:90:y:2013:i:1:p:136-147

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Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords: Strategic delegation; Preferential trade agreements; Political economy of trade protection;

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References

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Cited by:
  1. Appelbaum, Elie & Melatos, Mark, 2012. "Camouflaged Trade Agreements," Working Papers 2012-11, University of Sydney, School of Economics.
  2. Ketenci, Natalya, 2014. "The Effect of the European Union Customs Union on the Balance of Trade in Turkey," MPRA Paper 54662, University Library of Munich, Germany.
  3. James Lake & Halis M. Yildiz, 2014. "On the different geographic characteristics of Free Trade Agreements and Customs Unions," Departmental Working Papers 1403, Southern Methodist University, Department of Economics.

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