Asymmetric Country Customs Union Formation

Abstract

Using an N-heterogeneous-country Cournot intra-industry model with three dimensions of heterogeneity considered: i.e., marginal cost of production, market size, and industry concentration, the current paper shows that even under open regionalism regime, in contrast with Yi (1996), global free trade may not be attained via the expansion of customs union. The paper also characterizes the endogenous custom union formation path. When countries are farsightedly rational, customs union can serve as a stepping stone for multilateral liberalization.

Keywords: Customs Union, Free Trade Area, Preferential Trade Agreements

JEL Classification: F14, F15, O24