Rules for the disposition of tariff revenues and the determination of common external tariffs in customs unions

This paper is about the determination of common external tariffs (CETs) in customs unions (CUs). We first examine how the relationship between preferences over CET levels, technology and the distribution of factor ownership in a CU is conditioned by the rule that determines the disposition of tariff revenues. We then explore how majority voting at the country level translates these preferences into an equilibrium CET. Among other things, we find that, when revenues are partitioned in proportion to members’ imports, tariff preferences may be polarized, the trade patterns of some CU members may be endogenous, and, as a result, their payoff functions may not be single-peaked. This leads to voting outcomes that dramatically differ from those arising under other sharing rules (e.g., the ‘population’ and ‘consumption’ rules) and raises the possibility of a Condorcet paradox.