Customs unions and comparative advantage

Abstract

This paper constructs a simple, general equilibrium trade model to investigate how the formation of unconstrained, GATT-constrained, and Kemp-Wan customs unions affects inter-bloc tariffs and welfare. A central point of the paper is that the liberalization of intra-union trade creates incentives for all parties to reduce their remaining tariffs. Despite this, regional integration may not benefit non-member countries and, depending on trade patterns and comparative advantage, it may raise welfare of members more than a regime of globally free trade.

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