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

Masahiro Endoh

ビジネス創造センターディスカッション・ペーパー (Discussion papers of the Center for Business Creation) from Otaru University of Commerce

Abstract: The case is studied where several 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 the 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 some countries' welfare decrease, while the trade creation effect will result in all countries' welfare decreasing. Therefore, the conclusion is drawn that there is no incentive to form and maintain a customs union.

Keywords: Customs union; Trade diversion; Trade creation; Intra-union relative price; Foreign trade relative price effect; Domestic relative price effect (search for similar items in EconPapers)
Pages: 34 pages
Date: 1998-07
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Published in Discussion paper series (1998), 46: 1-34

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Journal Article: The Formation of Customs Unions and the Effect on Government Policy Objectives (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:ota:busdis:10252/4236

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