A New Look at Economic Integration
1982 (English)Report (Other academic)
This paper modifies the conventional analysis of customs unions by emphasizing four phenomena central to contemporary experience but less dealt with in the traditional literature: (i) product differentiation and intra-industry trade, (ii) scale economies and imperfect competition, (iii) changes in trade patterns stemming from elimination of tariffs on goods that are only traded within the union ("trade modification"), and (iv) small, rather than large, tariff changes. The paper derives two general propositions, employing (iii) and (iv), and discusses the implications for the optimal policy for countries considering integration. A special three-country general equilibrium model, incorporating all four features, is then employed to analyze how changes in internal and external tariffs affect product variety, terms of trade, trade flows, and welfare. It is shown that the implications for the three countries' welfare levels depend generally on the relation between the degree of product differentiation on the one hand, and properties of the economies' transformation functions on the other. The paper ends with an intermediate goods interpretation of the model.
Place, publisher, year, edition, pages
Stockholm: IIES , 1982. , 50 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 221
IdentifiersURN: urn:nbn:se:su:diva-41450OAI: oai:DiVA.org:su-41450DiVA: diva2:330337