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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 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. 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9135.

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Date of creation: Sep 2012
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Handle: RePEc:cpr:ceprdp:9135

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Keywords: Preferential Trade Agreements; Strategic delegation;

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Cited by:
  1. Elie Appelbaum & Mark Melatos, 2012. "Camouflaged Trade Agreements," Working Papers 2012_2, York University, Department 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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