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Miltilateral 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 multilperation. We model copperation 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 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 polices 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 on Tariffs and Trade.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1070.

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Date of creation: Nov 1993
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Handle: RePEc:nwu:cmsems:1070

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  1. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
  2. Kowalczyk, Carsten & Sjostrom, Tomas, 1994. "Bringing GATT into the Core," Economica, London School of Economics and Political Science, vol. 61(243), pages 301-17, August.
  3. Bond, E.W. & Syropoulos, C., 1993. "Optimality and Stability of Regional Trading Blocs," Papers 5-93-2, Pennsylvania State - Department of Economics.
  4. Kyle Bagwell & Robert Staiger, 1994. "Multilateral Tariff Cooperation During the Formation of Customs Unions," International Trade 9410002, EconWPA.
  5. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
  6. Kyle Bagwell & Robert W. Staiger, 1996. "Reciprocal Trade Liberalization," NBER Working Papers 5488, National Bureau of Economic Research, Inc.
  7. Kyle Bagwell & Robert W. Staiger, 1988. "A Theory of Managed Trade," NBER Working Papers 2756, National Bureau of Economic Research, Inc.
  8. Bond, E. & Syropoulos, C., 1993. "Trading Blocs and the Sustainability of Inter-Regional Cooperation," Discussion Papers 93-17, Department of Economics, University of Birmingham.
  9. 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.
  10. 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.
  11. Carsten Kowalczyk, 1990. "Welfare and Customs Unions," NBER Working Papers 3476, National Bureau of Economic Research, Inc.
  12. 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.
  13. Anne O. Krueger, 1993. "Free Trade Agreements as Protectionist Devices: Rules of Origin," NBER Working Papers 4352, National Bureau of Economic Research, Inc.
  14. Rodney D. Ludema, 1998. "On the Value of Preferential Trade Agreements in Multilateral Negotiations," International Trade 9802003, EconWPA.
  15. Arndt, Sven W, 1969. "Customs Union and the Theory of Tariffs," American Economic Review, American Economic Association, vol. 59(1), pages 108-18, March.
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