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Strategic Formation of Customs Unions

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  • Lucia Angelo

    ()
    (CEREGMIA, Université des Antilles et de la Guyane)

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    Abstract

    In this paper, we analyze the static eects of customs unions formation on national welfare under oligopolistic competition, accounting for market sizes, the number of rms and marginal costs. We build a basic four-country model, analyzing the members and non-members' welfare situation moving from tari-ridden trade to a single customs union and then to a double customs union situation, before analyzing a free trade option. Our analysis confirms that customs union formation generates positive eects on consumers and, under certain conditions, on producers within the union, while it has a negative impact on the rest of the world. We also identify conditions under which all countries may improve with several customs union formation . This exercise provides a simple yet direct explanation to the proliferation of trade agreements when these occur in waves. To this end, we solve a game with at least four countries and show that -under tari-ridden trade- the Nash equilibrium entails two customs unions formation between similar countries and under specic market conditions. However, whenever possible free trade remains the preferred option.

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    File URL: http://www2.univ-ag.fr/RePEc/DT/DT2012-02_Angelo.pdf
    File Function: First version, 2012
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    Bibliographic Info

    Paper provided by CEREGMIA, Université des Antilles et de la Guyane in its series Documents de Travail with number 2012-02.

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    Length: 30 pages
    Date of creation: Jul 2012
    Date of revision:
    Handle: RePEc:crg:wpaper:dt2012-02

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