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Strategic Formation of Customs Unions

Listed author(s):
  • Lucia Angelo


    (CEREGMIA, Université des Antilles et de la Guyane)

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    In this paper, we analyze the static eects of customs unions formation on national welfare under oligopolistic competition, accounting for market sizes, the number of rms and marginal costs. We build a basic four-country model, analyzing the members and non-members' welfare situation moving from tari-ridden trade to a single customs union and then to a double customs union situation, before analyzing a free trade option. Our analysis confirms that customs union formation generates positive eects on consumers and, under certain conditions, on producers within the union, while it has a negative impact on the rest of the world. We also identify conditions under which all countries may improve with several customs union formation . This exercise provides a simple yet direct explanation to the proliferation of trade agreements when these occur in waves. To this end, we solve a game with at least four countries and show that -under tari-ridden trade- the Nash equilibrium entails two customs unions formation between similar countries and under specic market conditions. However, whenever possible free trade remains the preferred option.

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    File Function: First version, 2012
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    Paper provided by CEREGMIA, Université des Antilles et de la Guyane in its series Documents de Travail with number 2012-02.

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    Length: 30 pages
    Date of creation: Jul 2012
    Handle: RePEc:crg:wpaper:dt2012-02
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