Customs Union or Free Trade Area? The Role of Political Asymmetries |
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Authors: | Subhayu Bandyopadhyay & Howard J Wall |
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Institution: | West Virginia University, USA,;Federal Reserve Bank of St Louis, USA |
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Abstract: | When trade policy is determined endogenously by lobbying, it matters whether countries are arranged into a customs union or a free trade area. This paper compares the two regimes when the member governments are asymmetric in their susceptibilities to lobbying and in their bargaining power within a customs union. In the model, a customs union never leads to lower tariffs for both countries, whereas it can lead to higher tariffs for both. |
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