Macroeconomics of Regional Integration: Withdrawal from a Customs Union

Abstract

This paper has two unique features: it deals with withdrawal from a customs union, which is a neglected aspect of international economic integration, and does so within a macroeconomic framework rather than standard general-partial equilibrium analysis. Withdrawal was in the British Labour Party`s 1983 election manifesto; Greenland actually withdrew from the European Communities in 1985; presently an influential section of the British Conservative Party and others wish to do so for the UK; and the European Union`s Reform Treaty for the first time allows for it. Moreover, given the recent proliferation in preferential trading arrangements, with overlap in membership, withdrawal is on the horizon. A simple, almost naive, macroeconomic framework is tailored for the purpose not only because of its direct policy relevance, but also because it adds variety to relevant discussion. The conclusion reached is that the model does not negate the general conclusion of the orthodox analysis: in the presence of constraints on the use of domestic and exchange-rate policies to achieve full employment, the model points to the general potential superiority of continued customs union membership over a policy of withdrawal.