Fortress Europe: Jericho or Château d’If?

Traditional analysis of customs union formation suggests that it leads to an increase in members’ external tariffs. This paper stresses two aspects of European trade and trade policy — a large volume of intra-industry trade between similar countries and a political motivation for tariffs — and highlights a role for tariff coordination in a model of differentiated products in which tariffs affect domestic costs and thus export prices and the magnitude of monopolistic rents. We show that when workers choose the tariffs and receive but a small portion of tariff revenues, the union’s tariff wall falls.