Optimal Tariff Equilibria with Customs Unions

John Kennan and Raymond Riezman

Chapter 5 in International Trade Agreements and Political Economy, 2013, pp 53-66 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe construct a model of customs unions in. which countries charge optimal tariffs. Customs unions internalize the externality that exists whenever two countries import the same good. Also, customs unions make several countries into one large unit with more market power. Big customs unions can improve their members' welfare relative to the free trade. Our model of customs unions separates the effects of tariff reduction from the effects of policy co-ordination. The movement from Nash equilibrium to a Free Trade Association improves global resource allocation. Moving from a Free Trade Association to a full customs union has ambiguous resource allocation effects.

Keywords: International Trade; Political Economy; Theory of International Free Trade Agreements; Customs Unions; Tariff Dynamics; Storable Votes (search for similar items in EconPapers)
Date: 2013
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Journal Article: Optimal Tariff Equilibria with Customs Unions (1990)
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