Working Paper: CEPR ID: DP605
Authors: Anthony J. Venables
Abstract: This paper analyses the customs union problem in a model containing a continuum of products. The continuum is in three dimensions, so that three countries each have a distinct comparative advantage. Trade patterns are endogenously determined, and changed by policy. This is in the tradition of Viner, but in contrast to recent models in which the direction of trade is exogenously given. The effects of internal liberalization of trade patterns and consequent welfare effects through trade creation, diversion, and modification are established. Optimal policies are characterized, and sufficient conditions for tariff reform to raise welfare are found. Interactions between internal and external policy are analysed.
Keywords: economic integration; customs union; preferential trade
JEL Codes: F1; F13; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| formation of a customs union (F15) | shift in the source of supply for certain products (F61) |
| shift in the source of supply for certain products (F61) | trade creation (F14) |
| shift in the source of supply for certain products (F61) | trade diversion (F14) |
| shift in the source of supply for certain products (F61) | trade modification (F14) |
| changes in tariffs (F19) | changes in trade patterns (F12) |
| changes in tariffs (F19) | labor demand (J23) |
| labor demand (J23) | welfare outcomes (I38) |