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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 10% 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.

Suggested Citation

  • Facchini, Giovanni & Silva, Peri & Willmann, Gerald, 2013. "The customs union issue: Why do we observe so few of them?," Journal of International Economics, Elsevier, vol. 90(1), pages 136-147.
  • Handle: RePEc:eee:inecon:v:90:y:2013:i:1:p:136-147
    DOI: 10.1016/j.jinteco.2012.09.004
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    Citations

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    Cited by:

    1. Natalya Ketenci, 2017. "The Effect of the European Union Customs Union on the Balance of Trade in Turkey," Foreign Trade Review, , vol. 52(4), pages 219-232, November.
    2. Appelbaum, Elie & Melatos, Mark, 2012. "Camouflaged Trade Agreements," Working Papers 2012-11, University of Sydney, School of Economics.
    3. Mai, Joseph & Stoyanov, Andrey, 2018. "Tariff Cooperation in Free Trade Areas," MPRA Paper 84398, University Library of Munich, Germany.
    4. Hinnerk Gnutzmann & Arevik Gnutzmann-Mkrtchyan, 2016. "The Silent Success of Customs Unions," CESifo Working Paper Series 5944, CESifo Group Munich.
    5. Lake, James & Yildiz, Halis M., 2016. "On the different geographic characteristics of Free Trade Agreements and Customs Unions," Journal of International Economics, Elsevier, vol. 103(C), pages 213-233.
    6. György Simon, Jr, 2010. "On The Customs Union Of Belarus, Kazakhstan And Russia," Economic Annals, Faculty of Economics, University of Belgrade, vol. 55(184), pages 7-28, January –.
    7. Giovanni Facchini & Peri Silva & Gerald Willmann, 2015. "The Political Economy of Preferential Trade Arrangements: An Empirical Investigation," Discussion Papers 2015-16, University of Nottingham, GEP.
    8. repec:smu:ecowpa:1403 is not listed on IDEAS
    9. Facchini, Giovanni & Silva, Peri & Willmann, Gerald, 2017. "The political economy of preferential trade agreements: An empirical investigation," Kiel Working Papers 2096, Kiel Institute for the World Economy (IfW).
    10. Gabriel Felbermayr & Feodora Teti & Erdal Yalcin, 2018. "On the Profitability of Trade Deflection and the Need for Rules of Origin," CESifo Working Paper Series 6929, CESifo Group Munich.
    11. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, Elsevier.
    12. James Lake, 2016. "Why don't more countries form Customs Unions instead of Free Trade Agreements? The role of flexibility," Departmental Working Papers 1601, Southern Methodist University, Department of Economics.

    More about this item

    Keywords

    Strategic delegation; Preferential trade agreements; Political economy of trade protection;

    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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