Working Paper: CEPR ID: DP962
Authors: Kyle Bagwell; Robert W. Staiger
Abstract: We study the implications of customs union formation for multilateral tariff cooperation. We model cooperation in multilateral trade policy as self-enforcing, in that it involves balancing the current gains from deviating unilaterally from an agreed-upon trade policy against the future losses from forfeiting the benefits of multilateral cooperation that such a unilateral defection would imply. The early stages of the process of customs union formation are shown to alter this dynamic incentive constraint in a way that leads to a temporary `honeymoon' for liberal multilateral trade policies. We find, however, that the harmony between customs unions and multilateral liberalization is temporary: Eventually, as the full impact of the emerging customs union becomes felt, a less favourable balance between current and future conditions re-emerges, and the liberal multilateral policies of the honeymoon phase cannot be sustained. We argue that this is compatible with the evolving implications of the formation of the European Community customs union for the ability to sustain liberal multilateral trade policies under the General Agreement on Tariffs and Trade.
Keywords: Regionalism; Customs Unions; Tariff Cooperation
JEL Codes: F13; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| customs union formation (F15) | temporary honeymoon for liberal multilateral trade policies (F13) |
| temporary honeymoon for liberal multilateral trade policies (F13) | initial increase in cooperation (D70) |
| customs union formation (F15) | increased multilateral trade tensions (F13) |
| increased multilateral trade tensions (F69) | rise in tariffs (F19) |
| customs union formation (F15) | deterioration of liberal multilateral policies (F68) |