Some Welfare Effects of Dynamic Customs Union Formation

This paper deals with an issue of increasing importance in a world where preferential trading arrangements are the call of the day: the effects on world welfare of sequential customs union foration. A computational model of customs union formation is developed and simulated under a variety of assumptions. These assumptions concern various characteristics of the world, the pattern of customs union formation, and GATT restrictions on the common external tariff imposed by the customs union. The results show that unrestricted customs union formation is likely to result in successive deterioration of world welfare, despite gains for the member countries collectively. An examination of the current GAA guidelines, however, reveals that if they were more vigorously enforced, the deleterious effects of customs union formation could be eliminated