Exchanging market access at the outsiders' expense: the case of customs unions

TLDR

Customs unions allow member countries to coordinate external tariffs, shifting profits from excluded countries. The study shows that small countries can use customs unions to foster multilateral cooperation by increasing incentives for excluded countries to support global free trade. Tariff coordination generates exporting rents that can offset trade diversion losses for small members, yet these gains come at the expense of excluded countries and may incentivize them to support global free trade. Abstract.

Abstract

Abstract. Under a customs union, countries can exchange preferential market access by coordinating external tariffs to shift profits from excluded countries. I show that the exporting rents resulting from this coordination can offset trade diversion losses produced by the union, even if its members are relatively small in world markets. Such gains come, however, at the expense of excluded countries. I show that small countries can use customs unions also to foster multilateral cooperation, by increasing the incentives of excluded countries to support global free trade.