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Multilateral Tariff Cooperation during the Formation of Customs Unions

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  • Kyle Bagwell
  • Robert W. Staiger

Abstract

We study the implications of customs union formation for multilateral tariff cooperation. We model cooperation in multilateral trade policy as self-enforcing, in that it involves balancing the current gains from deviating unilaterally from an agreed-upon trade policy against the future losses from forfeiting the benefits of multilateral cooperation that such a unilateral defection would imply. The early stages of the process of customs union formation are shown to alter this dynamic incentive constraint in a way that leads to a temporary 'honeymoon' for liberal multilateral trade policies. We find, however, that the harmony between customs unions and multilateral liberalization is temporary: Eventually, as the full impact of the emerging customs union becomes felt, a less favorable balance between current and future conditions reemerges, and the liberal multilateral policies of the honeymoon phase cannot be sustained. We argue that this is compatible with the evolving implications of the formation of the European Community customs union for the ability to sustain liberal multilateral trade policies under the General Agreement of Tariffs and Trade.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4543.

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Date of creation: Nov 1993
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Publication status: published as Journal of International Economics, February, 1997.
Handle: RePEc:nbr:nberwo:4543

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  1. Kyle Bagwell & Robert Staiger, 1994. "Multilateral Tariff Cooperation During the Formation of Customs Unions," International Trade 9410002, EconWPA.
  2. Carsten Kowalczyk, 1990. "Welfare and Customs Unions," NBER Working Papers 3476, National Bureau of Economic Research, Inc.
  3. Bagwell, K. & Staiger, R.W., 1996. "Reciprocal Trade Liberalization," Working papers 9602, Wisconsin Madison - Social Systems.
  4. Kyle Bagwell & Robert W. Staiger, 1989. "A Theory of Managed Trade," Discussion Papers 801, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Rodney D. Ludema, 1998. "On the Value of Preferential Trade Agreements in Multilateral Negotiations," International Trade 9802003, EconWPA.
  6. Arndt, Sven W, 1969. "Customs Union and the Theory of Tariffs," American Economic Review, American Economic Association, vol. 59(1), pages 108-18, March.
  7. Carsten Kowalczyk & Tomas Sjostrom, 1993. "Bringing GATT into the Core," NBER Working Papers 4343, National Bureau of Economic Research, Inc.
  8. Kyle Bagwell & Robert W. Staiger, 1993. "Multilateral Tariff Cooperation During the Formation of Free Trade Areas," Discussion Papers 1048, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Bond, E. & Syropoulos, C., 1993. "Trading Blocs and the Sustainability of Inter-Regional Cooperation," Discussion Papers 93-17, Department of Economics, University of Birmingham.
  10. Anne O. Krueger, 1993. "Free Trade Agreements as Protectionist Devices: Rules of Origin," NBER Working Papers 4352, National Bureau of Economic Research, Inc.
  11. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-19, September.
  12. Bond, E.W. & Syropoulos, C., 1993. "Optimality and Stability of Regional Trading Blocs," Papers 5-93-2, Pennsylvania State - Department of Economics.
  13. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
  14. Kemp, Murray C. & Wan, Henry Jr., 1976. "An elementary proposition concerning the formation of customs unions," Journal of International Economics, Elsevier, vol. 6(1), pages 95-97, February.
  15. Bond, Eric W. & Syropoulos, Constantinos, 1996. "The size of trading blocs Market power and world welfare effects," Journal of International Economics, Elsevier, vol. 40(3-4), pages 411-437, May.
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