An elementary proposition concerning the formation of customs unions

Abstract

1‘ Introduction In the welter of inconclusive debate concerning the implications of customs u.nions, the following elementary yet basic proposition seems to have been almost lost to sight1 Froposition. Ccnsiaer any competitive world trading ewilibrium, with any number of countries and commodities, and with no restrictions whatever on the tariffs and other commodity taxes of individual countries, and with costs of trans- port fully recognized. Now let any subset of the countries form a customs unton. Then there exists a common tartrvector and a system of lump-sum compensatory payments, involving only members of the union, such that there is an associated tart$ridden competitive equilibrium in which each individual, whether a member of the union or not, is not worse oRthan before theformation of the union2 A detailed list of assumptions, and a relatively formal proof, may be found in section 2. Here we merely note that there exists a common tariff vector which is consistent with pre-union world prices and, therefore, with pre-u,nion trade patterns and pre-union levels of welfare for nonmembers. The proposition is interesting in that it contains no qualifications whatever