Multilateral Tariff Cooperation During the Formation of Customs Unions

55 Pages Posted: 17 Oct 2007 Last revised: 2 Dec 2022

See all articles by Kyle Bagwell

Kyle Bagwell

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Robert W. Staiger

Stanford University; University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 1993

Abstract

We study the implications of customs union formation for multilateral tariff cooperation. We model cooperation in multilateral trade policy as self-enforcing, in that it involves balancing the current gains from deviating unilaterally from an agreed-upon trade policy against the future losses from forfeiting the benefits of multilateral cooperation that such a unilateral defection would imply. The early stages of the process of customs union formation are shown to alter this dynamic incentive constraint in a way that leads to a temporary 'honeymoon' for liberal multilateral trade policies. We find, however, that the harmony between customs unions and multilateral liberalization is temporary: Eventually, as the full impact of the emerging customs union becomes felt, a less favorable balance between current and future conditions reemerges, and the liberal multilateral policies of the honeymoon phase cannot be sustained. We argue that this is compatible with the evolving implications of the formation of the European Community customs union for the ability to sustain liberal multilateral trade policies under the General Agreement of Tariffs and Trade.

Suggested Citation

Bagwell, Kyle and Staiger, Robert W., Multilateral Tariff Cooperation During the Formation of Customs Unions (November 1993). NBER Working Paper No. w4543, Available at SSRN: https://ssrn.com/abstract=480274

Kyle Bagwell (Contact Author)

Stanford University - Department of Economics ( email )

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Robert W. Staiger

Stanford University ( email )

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University of Wisconsin - Madison - Department of Economics ( email )

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