Abstract
Formation of a customs union by developing countries is likely to affect extra-union exports of industrial goods. Two competing hypotheses as to the likely direction of such effects are presented, related to the more conventional concepts of trade creation and trade diversion, and tested. On one hand, increased competition and intra-industry specialization may lead to the emergence of larger, more specialized firms which will be more able to export to the rest of the world. On the other hand, expansion of the protected ‘domestic’ marke may induce firms to sell domestically products that they would otherwise have exported. Evidence from the Central American Common Market (CACM) is consistent with each of the two hypotheses for different goods. In aggregate, CACM extra-union exports of industrial goods did not keep pace with the increase in extra-union imports during 1962–1968.
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