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On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions

Author

Listed:
  • Kamal Saggi

    (Department of Economics, Vanderbilt University)

  • Alan Woodland

    (Department of Economics, University of New South Wales)

  • Halis Murat Yildiz

    (Department of Economics, Ryerson University)

Abstract

This paper analyzes a game of trade policy (called Bilateralism) between three countries in which each country chooses whether to liberalize trade preferentially in the form of a Customs Union (CU), multilaterally, or not at all. We also analyze a restricted version of this game (called Multilateralism) under which countries do not have the option to form CUs. The analysis sheds light on the relationship between multilateral and preferential trade liberalization as sanctioned by GATT Article XXIV. We find that when countries have symmetric endowments, global free trade can be achieved without permitting CUs. Allowing for asymmetry, we isolate circumstances where Article XXIV helps further the cause of multilateral liberalization as well as when it does not. Furthermore, we show that Article XXIV's stipulation -- that countries forming a CU not raise tariffs on outsiders -- fails to make multilateral liberalization any more attractive to countries. However, such a tariff restriction does lower the adverse impact of a CU on the non-member.

Suggested Citation

  • Kamal Saggi & Alan Woodland & Halis Murat Yildiz, 2011. "On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions," Vanderbilt University Department of Economics Working Papers 1116, Vanderbilt University Department of Economics.
  • Handle: RePEc:van:wpaper:1116
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Customs Unions; preferential trade agreements; multilateral trade liberalization; GATT; WTO;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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