A Note on Customs Unions vs. Non-Preferential Tariffs

Beginning of article

It has been known that making a non-preferential tariff reduction is always superior to joining a customs union (Cooper and Massell, 1965]. This proposition is based on the assumption that the country concerned is a small country. The purpose of this paper is to show that if the country concerned is a large country, then joining a customs union is not necessarily inferior to making a non-preferential tariff reduction. (1)

The standard three country trade model will be used in this study. Country A is the home country. Country B is the other member of the customs union and country C is the non-member country, representing the rest of the world.

Consider a small country A. In Figure 1, [D.sub.A] is the import demand curve for good X in country A. [S.sub.B] and [S.sub.C] are the export supply curves of countries B and C, respectively. [S.sub.B] and [S.sub.C] are both horizontal lines under the assumption that country A is a small country. The price of good X in country C is assumed to be lower than that in country B.

Suppose that country A initially imposes a non-preferential tariff, T, before a customs union. The price of good X in country A is [P'.sub.1]. Country A imports [P'.sub,1] a of …