The Customs Union Issue: Why Do We Observe so Few of Them?

37 Pages Posted: 28 Sep 2012

See all articles by Giovanni Facchini

Giovanni Facchini

University of Nottingham

Peri A. Silva

University of Illinois at Urbana-Champaign - Department of Economics

Gerald Willmann

Bielefeld University; IfW Kiel; KU Leuven; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 2012

Abstract

The number of preferential trade agreements has greatly increased over the past two decades, yet most existing arrangements take the form of free trade areas, and less than ten percent can be considered to be fully fledged customs unions. This paper develops a political economy model of trade policy under imperfect competition to provide a positive explanation for the prevalence of free trade areas. In a three--country setting, a representative from each prospective member is elected to determine the tariffs to be applied on imported goods. Under a customs union, the necessity to coordinate tariffs leads voters to strategically delegate power to more protectionist representatives. We show that strategic delegation may imply that free trade areas increase the prospective member countries' welfare compared to customs unions. Moreover, the model also indicates conditions under which free trade areas are more likely to be politically viable than customs unions.

Keywords: Preferential Trade Agreements, Strategic delegation

JEL Classification: F10, F11, F13

Suggested Citation

Facchini, Giovanni and Silva, Peri A. and Willmann, Gerald, The Customs Union Issue: Why Do We Observe so Few of Them? (September 2012). CEPR Discussion Paper No. DP9135, Available at SSRN: https://ssrn.com/abstract=2153576

Giovanni Facchini

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Peri A. Silva

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States
217-333 0120 (Phone)
217-244-6678 (Fax)

Gerald Willmann

Bielefeld University ( email )

Universitätsstraße 25
Bielefeld, NRW 33613
Germany

IfW Kiel ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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