Working Paper: CEPR ID: DP2528
Authors: Anthony J. Venables
Abstract: How are the benefits - and costs - of a customs union divided between membercountries? Outcomes depend on the comparative advantage of member countries,relative to each other and to the rest of the world. Countries with a comparativeadvantage between that of their partners and the rest of the world do better thancountries with an 'extreme' comparative advantage. As a consequence, integrationbetween low income countries tends to lead to divergence of member countryincomes, while agreements between high income countries cause convergence. Resultssuggest that developing countries are likely to be better served by 'north-south' thanby 'south-south' free trade agreements.
Keywords: customs union; regional integration; trade creation; trade diversion
JEL Codes: F10; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regional Integration Agreements (RIAs) among high-income countries (F15) | convergence of income levels (F62) |
| Regional Integration Agreements (RIAs) among low-income countries (F15) | divergence of income levels (D31) |
| Customs Unions (CUs) with intermediate comparative advantage (F15) | benefit more from CU (D61) |
| Customs Unions (CUs) with extreme comparative advantages (F15) | decline in welfare (I38) |
| Trade diversion (F14) | income divergence among low-income countries (F63) |
| Trade creation (F19) | income convergence among high-income countries (F62) |
| North-south agreements (F53) | minimize trade diversion and maximize trade creation (F13) |