Working Paper: CEPR ID: DP1317
Authors: Eric W. Bond; Constantinos Syropoulos; L. Alan Winters
Abstract: We consider a simple three-country, multi-commodity trade model in which two custom union members that have successfully coordinated their external tariff policies are in the process of deepening the integration of their internal markets through the removal of tariffs on intra-union trade. Union and non-union countries cannot sign binding trade agreements. Owing to repeated interactions, however, they can sustain cooperative outcomes with the use of history-dependent strategies. The goal of this paper is to examine how the deepening of integration affects the set of incentive-compatible tariff agreements these parties can support. We derive conditions under which Kemp-Wan (1976) adjustments in the external tariffs of union members are sustainable and we use these adjustments as a frame of reference to evaluate the actual tariff-setting incentives of trading partners. Our analysis reveals that the deepening of integration may enlarge the set of sustainable tariff agreements with the outside country, and that this possibility crucially depends on the degree of substitutability in consumption. We also investigate the effects of integration on sustainable levels of welfare and extend our analysis to consider the effects of political economy factors.
Keywords: regional integration; tariff negotiations; Kemp-Wan tariff adjustments; Europe 1992
JEL Codes: F13; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deepening of integration (F15) | enlargement of sustainable tariff agreements (F13) |
| internal tariff reductions (F15) | attractiveness of external tariff agreements (F13) |
| Kemp-Wan adjustment (F32) | incentive compatibility of trade agreements (F13) |
| internal tariff reductions (F15) | external tariff adjustments (F14) |
| Kemp-Wan adjustment (F32) | attractiveness of initial agreement (C78) |
| Kemp-Wan adjustment (F32) | attractiveness of deviating from agreement (C78) |