Abstract
The whole theory of customs union and the second-best theory originated with the pathbreaking work of Viner's The Customs Union Issue [36]. Viner draws a fundamental distinction between the trade-creating and the trade-diverting effects of a customs union. The former involves a shift from a high-cost domestic production to a lowest-cost production in a partner country, the latter a shift from the lowest-cost external producer to a higher-cost partner. Viner demonstrates that trade creation improves the home country's welfare and trade diversion lowers it.
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