Working Paper: CEPR ID: DP7144
Authors: Monika Mrazova; David Vines; Ben Zissimos
Abstract: This paper shows that the WTO's Article XXIV increases the likelihood of free trade, but may worsen world welfare when free trade is not reached and customs unions (CUs) form. We consider a model of many countries. Article XXIV prevents a CU from raising its common external tariff, which makes CU formation less attractive and explains why free trade is more likely. In an equilibrium where two CUs do form, one is necessarily larger than the other. We show that Article XXIV has a 'composition effect' on CU formation, whereby CUs are (endogenously) less asymmetric in size so more goods are subject to tariff distortions as they move between CUs; thus Article XXIV may be 'bad' for world welfare.
Keywords: coalition formation; game; customs union; protection; trade block; trade liberalization
JEL Codes: F02; F13; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Article XXIV (Y20) | likelihood of free trade (F10) |
| likelihood of free trade (F10) | world welfare (I30) |
| Article XXIV (Y20) | world welfare (I30) |
| Article XXIV (Y20) | CU formation (Y50) |
| CU formation (Y50) | world welfare (I30) |