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The Customs Union issue: Why do we observe so few of them?

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Author Info
Giovanni Facchini
Peri Silva
Gerald Willmann

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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 tariff 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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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces0827.

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Date of creation: Oct 2008
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Handle: RePEc:ete:ceswps:ces0827

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Related research
Keywords: Strategic delegation; Preferential Trade Agreements.;

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Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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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. [Downloadable!] (restricted)
  2. Paola Conconi & Giovanni Facchini & Maurizio Zanardi, 2008. "Fast Track Authority and International Trade Negotiations," Development Working Papers 246, Centro Studi Luca d\'Agliano, University of Milano. [Downloadable!]
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  3. Gatsios, Konstantine & Karp, Larry, 1989. "Delegation Games in Customs Unions," CEPR Discussion Papers 337, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Alesina, Alberto & Rodrik, Dani, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 465-90, May. [Downloadable!] (restricted)
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  5. Jones, Stephen R. G., 1989. "Have your lawyer call my lawyer : Bilateral delegation in bargaining situations," Journal of Economic Behavior & Organization, Elsevier, vol. 11(2), pages 159-174, March. [Downloadable!] (restricted)
  6. Ornelas, Emanuel, 2005. "Trade creating free trade areas and the undermining of multilateralism," European Economic Review, Elsevier, vol. 49(7), pages 1717-1735, October. [Downloadable!] (restricted)
  7. Dutt, Pushan & Mitra, Devashish, 2002. "Endogenous trade policy through majority voting: an empirical investigation," Journal of International Economics, Elsevier, vol. 58(1), pages 107-133, October. [Downloadable!] (restricted)
  8. Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, vol. 52(2), pages 359-376, December. [Downloadable!] (restricted)
  9. Kamal Saggi, 2006. "Preferential Trade Agreements And Multilateral Tariff Cooperation ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 29-57, 02. [Downloadable!] (restricted)
  10. Pravin Krishna, 1998. "Regionalism And Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 227-250, February. [Downloadable!] (restricted)
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  11. Giovanni Facchini & Oliver Lorz & Gerald Willmann, 2006. "Asylum seekers in Europe: the warm glow of a hot potato," Journal of Population Economics, Springer, vol. 19(2), pages 411-430, June. [Downloadable!] (restricted)
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  12. Laussel, Didier & Riezman, Raymond, 2005. "The sources of protectionist drift in representative democracies," European Economic Review, Elsevier, vol. 49(7), pages 1855-1876, October. [Downloadable!] (restricted)
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  13. Antoni Estevadeordal & Caroline Freund & Emanuel Ornelas, 2008. "Does Regionalism Affect Trade Liberalization Towards Non-Members?," CEP Discussion Papers dp0868, Centre for Economic Performance, LSE. [Downloadable!]
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  14. Emanuel Ornelas, 2007. "Exchanging market access at the outsiders' expense: the case of customs unions," Canadian Journal of Economics, Canadian Economics Association, vol. 40(1), pages 207-224, February. [Downloadable!] (restricted)
  15. Facchini, Giovanni & Testa, Cecilia, 2008. "Who is Against a Common Market?," CEPR Discussion Papers 6847, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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