Determining Harmonised Trade Policy: Evidence from the Eurasian Customs Union

Abstract

How do member states agree on the common tariff policy in a Customs Union? While a large theoretical literature studies the incentives faced by governments when negotiating the common external tariff (CET), empirical evidence is so far scant. This paper studies a large panel of applied tariffs in the recently created Eurasian Customs Union to understand the bargaining behind the common tariff. The results identify and highlight the importance of mutual protectionism: member states bargain to expand to their partners the protection of goods that were protected nationally. Moreover, there is no evidence of exercising bargaining power to keep the CET down for the goods where a member would see large tariff increases from partners. Thus countries bargain for mutual protection, rather than mutual liberalisation concessions. I develop a political economy model where governments can be lobbied by industries with imperfect competition to derive the empirical model. I test the prediction that the weight of each country's tariff in the determination of the CET is highest for goods that it protected more than the partners. The results confirm the prediction and show the emergence of mutual protectionism with several empirical models. These are OLS regressions, analysis of variance that determines unique explanatory power of each country tariffs in the CET and determining the Shapley value of each country's tariff in the CET.