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The Customs Union Issue: Why do we Observe so few of them?

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  • Giovanni Facchini
  • Peri A. Silva
  • Gerald Willmann

Abstract

The number of preferential trade agreements has greatly increased over the past two decades, yet most existing bilateral arrangements take the form of free trade areas, and less than ten percent 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. Contrary to most of the existing literature, we show that strategic delegation may imply that free trade areas increase welfare compared to customs unions. Moreover, the model also indicates that free trade areas are more likely to be politically viable than customs unions.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-10/cesifo1_wp2426.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2426.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2426

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Keywords: strategic delegation; preferential trade agreements;

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References

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  1. Emanuel Ornelas, 2005. "Rent Destruction and the Political Viability of Free Trade Agreements," The Quarterly Journal of Economics, MIT Press, vol. 120(4), pages 1475-1506, November.
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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.

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