The Economic Principles of European Integration

By Stephen Frank Overturf | Go to book overview

CHAPTER3
Customs Union Theory

Customs union theory relates to the perceived gains from the establishment of such a union. These include gains from specialization of production, economies of scale, greater competition, externalities associated with agglomeration, improvement in the terms of trade, an increased rate of growth, and political unification.


SPECIALIZATION OF PRODUCTION

Most of the theoretical effort has been put into the first of these, that is, attempting to demonstrate that the establishment of a customs union leads necessarily to an improvement in welfare, along the lines of the gains associated with moving from a state of no trade to free international trade. Such a direct application of the traditional theory regarding the gains from trade would appear to be clear-cut, but it turns out that such a gain cannot be presumed a priori for the establishment of a customs union.

In order to demonstrate this notion, it is important to review the traditional theory as it applies to the costs involved with introducing a tariff on a previously freely traded good. The partial equilibrium analysis for such a situation is presented in Figure 3.1, where D and S are the domestic demand and supply curves, respectively, for the good. The autarky (no trade) price for this good (PA) is relatively "high" compared with the world price (PW), thus demonstrating that the country does not have a comparative advantage in the production of the good. Once again according to standard international trade theory, this is probably due to the fact that the country is relatively insufficiently endowed with the factors of

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The Economic Principles of European Integration
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Preface xi
  • Acknowledgments xiii
  • Chapter 1 History of European Economic Integration 1
  • Chapter 2 Community Institutions 15
  • Chapter3 Customs Union Theory 21
  • Chapter 4 Factor Mobility and Tax Harmonization 35
  • Chapter 5 Monetary Union 46
  • Conclusion 59
  • Chapter 6 Industrial Policy 61
  • Chapter 7 Common Agricultural Policy 75
  • Conclusion 87
  • Chapter 8 Trade Relations: Developing Countries 89
  • Conclusion 101
  • Chapter 9 Trade Relations: More Developed Countries 102
  • Chapter 10 Regional Policy 118
  • Chapter 11 Social Policy 134
  • Conclusion 144
  • Appendix Treaty Establishing the European Economic Community 147
  • Bibliography 167
  • Index 169
  • About the Author 173
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