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Optimal Tariff Equilibria with Customs Unions

In: International Trade Agreements and Political Economy

Author

Listed:
  • JOHN KENNAN

    (University of Iowa, USA)

  • RAYMOND RIEZMAN

    (University of Iowa, USA)

Abstract

AbstractWe construct a model of customs unions in. which countries charge optimal tariffs. Customs unions internalize the externality that exists whenever two countries import the same good. Also, customs unions make several countries into one large unit with more market power. Big customs unions can improve their members' welfare relative to the free trade. Our model of customs unions separates the effects of tariff reduction from the effects of policy co-ordination. The movement from Nash equilibrium to a Free Trade Association improves global resource allocation. Moving from a Free Trade Association to a full customs union has ambiguous resource allocation effects.

Suggested Citation

  • John Kennan & Raymond Riezman, 2013. "Optimal Tariff Equilibria with Customs Unions," World Scientific Book Chapters,in: International Trade Agreements and Political Economy, chapter 5, pages 53-66 World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789814390125_0005
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    Keywords

    International Trade; Political Economy; Theory of International Free Trade Agreements; Customs Unions; Tariff Dynamics; Storable Votes;

    JEL classification:

    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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