Strategic Formation of Customs Unions

Lucia Angelo ()
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Lucia Angelo: CEREGMIA, Université des Antilles et de la Guyane

No 2012-02, Documents de Travail from CEREGMIA, Université des Antilles et de la Guyane

Abstract: 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.

Pages: 30 pages
Date: 2012-07
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