The Silent Success of Customs Unions

40 Pages Posted: 4 Sep 2014 Last revised: 20 Mar 2017

See all articles by Hinnerk Gnutzmann

Hinnerk Gnutzmann

Leibniz Universität Hannover - Faculty of Economics and Management

Arevik Gnutzmann-Mkrtchyan

Leibniz Universität Hannover - Faculty of Economics and Management; European University Institute - Economics Department (ECO)

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Date Written: February 1, 2016

Abstract

Membership in customs unions (CU) has proliferated in past decades; globally, 81 countries are now part of a CU. 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 that CUs are the most politically viable trade agreement, since they are rent-creating. But CU is also 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.

Keywords: customs unions; political viability; member welfare

JEL Classification: F12, F13, F14

Suggested Citation

Gnutzmann, Hinnerk and Gnutzmann-Mkrtchyan, Arevik, The Silent Success of Customs Unions (February 1, 2016). Available at SSRN: https://ssrn.com/abstract=2490929 or http://dx.doi.org/10.2139/ssrn.2490929

Hinnerk Gnutzmann (Contact Author)

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

HOME PAGE: http://www.gnutzmann.info

Arevik Gnutzmann-Mkrtchyan

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

European University Institute - Economics Department (ECO) ( email )

Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy

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