TY - JOUR

T1 - The silent success of customs unions

AU - Gnutzmann, Hinnerk

AU - Gnutzmann-Mkrtchyan, Arevik

N1 - Funding Information: We thank Luigi Filippini, Piero Gottardi and Natalya Volchkova, who followed and supported the paper throughout, seminar audiences at the EUI in Florence, New Economic School in Moscow and Catholic University of Milan and Kiel Institute of World Economics. Thanks to Zoe Vercelli for proofreading the manuscript and Paul Schaudt and Melvin Wong for helpful comments. Discussions with Christian Henn, Emanuel Ornelas, Kamal Saggi, Bernard Hoekman, Martin Gassebner, David Tarr and Gerald Willmann substantially improved the paper. Conference participants at ETSG 2012 in Leuven, RIEF 2012 in Milan and EEA 2013 in Gothenburg provided valuable feedback. Would like to thank the editor and two anonymous referees for their constructive comments, which greatly improved the paper.

PY - 2019/2/11

Y1 - 2019/2/11

N2 - Globally, 81 countries are now part of a customs union (CU), following the rapid proliferation of this type of trade agreement in past decades. Much of this growth has been driven by countries “upgrading” their links from a free trade agreement (FTA) to CU. At the same time, the rapid formation of new FTAs among countries that had no prior agreement in place has largely overshadowed this growth, making CUs the silent success of regional integration. Using the canonical regionalism model, augmented to allow for political bias towards firm interests, we investigate the endogenous choice of trade agreement. We show it is generally politically viable to move from FTA to CU, because such a move is rent-creating; but for countries without a trade agreement in place, it may be optimal to form an FTA as a stepping stone to reduce the risk of political derailment. Importantly, forming a CU is consistent with member social welfare maximization: as long as trade with the rest of the world does not cease entirely, a CU leads to higher social welfare than either FTA or no agreement. These gains come at the expense of third-country welfare. If past trends continue, one can expect more FTAs to be upgraded to CU with associated adverse consequences for outsiders.

AB - Globally, 81 countries are now part of a customs union (CU), following the rapid proliferation of this type of trade agreement in past decades. Much of this growth has been driven by countries “upgrading” their links from a free trade agreement (FTA) to CU. At the same time, the rapid formation of new FTAs among countries that had no prior agreement in place has largely overshadowed this growth, making CUs the silent success of regional integration. Using the canonical regionalism model, augmented to allow for political bias towards firm interests, we investigate the endogenous choice of trade agreement. We show it is generally politically viable to move from FTA to CU, because such a move is rent-creating; but for countries without a trade agreement in place, it may be optimal to form an FTA as a stepping stone to reduce the risk of political derailment. Importantly, forming a CU is consistent with member social welfare maximization: as long as trade with the rest of the world does not cease entirely, a CU leads to higher social welfare than either FTA or no agreement. These gains come at the expense of third-country welfare. If past trends continue, one can expect more FTAs to be upgraded to CU with associated adverse consequences for outsiders.

UR - http://www.scopus.com/inward/record.url?scp=85060344632&partnerID=8YFLogxK

U2 - 10.1111/caje.12369

DO - 10.1111/caje.12369

M3 - Article

AN - SCOPUS:85060344632

VL - 52

SP - 178

EP - 224

JO - Canadian Journal of Economics

JF - Canadian Journal of Economics

SN - 0008-4085

IS - 1

ER -