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

Masahiro Endoh

Economia Internazionale / International Economics, 2000, vol. 53, issue 3, 299-320

Abstract: The case is studied where two 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 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 one country’s welfare decrease, while the trade creation effect will result in a decrease in both countries’ welfare. The conclusion is that there is no incentive to form and maintain a customs union.

Keywords: Customs union; Second-best tariff; Trade diversion; Trade creation; Intra-union relative price (search for similar items in EconPapers)
JEL-codes: F13 F15 (search for similar items in EconPapers)
Date: 2000
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Working Paper: The Formation of Customs Unions and the Effect on Government Policy Objectives (1998)
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