Why don't more countries form Customs Unions instead of Free Trade Agreements? The role of flexibility

James Lake

No 1601, Departmental Working Papers from Southern Methodist University, Department of Economics

Abstract: In practice, Free Trade Agreements (FTAs) outnumber Customs Unions (CUs) by a ratio of 9 : 1. Nevertheless, the literature traditionally views CUs as optimal for members because CU members coordinate external tariffs. I show that a dynamic FTA flexibility benefit can help explain the prevalence of FTAs : individual FTA members have the flexibility to form their own future FTAs whereas CU members must jointly engage in future CU formation. Under asymmetry, even arbitrarily small degrees thereof, FTAs emerge in equilibrium if and only if the FTA flexibility benefit outweighs the CU coordination benefit.

Keywords: Preferential Trade Agreement; Free Trade Agreement; Customs Union; coordination; flexibility; free riding; networks; farsighted. (search for similar items in EconPapers)
JEL-codes: C71 F12 F13 (search for similar items in EconPapers)
Date: 2016-01
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Citations: View citations in EconPapers (1)

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