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The Formation of Customs Unions and the Effect on Government Policy Objectives

Author

Listed:
  • Endoh, Masahiro

Abstract

The case is studied where several small countries, wanting to set second-best tariffs to maximize objective functions, move from the situation where they can set their most appropriate tariffs to the situation where they form a customs union. By dividing the overall effect of forming customs unions into the trade diversion, trade creation, and intra-union relative price effects, it is found that the trade diversion effect and intra-union relative price effect will make some countries' welfare decrease, while the trade creation effect will result in all countries' welfare decreasing. Therefore, the conclusion is drawn that there is no incentive to form and maintain a customs union.

Suggested Citation

  • Endoh, Masahiro, 1998. "The Formation of Customs Unions and the Effect on Government Policy Objectives," ビジネス創造センターディスカッション・ペーパー (Discussion papers of the Center for Business Creation) 10252/4236, Otaru University of Commerce.
    • Handle: RePEc:ota:busdis:10252/4236
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    Keywords

    Customs union; Trade diversion; Trade creation; Intra-union relative price; Foreign trade relative price effect; Domestic relative price effect;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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