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Tariff revenue competition in a free trade area

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  • Richardson, Martin

Abstract

This note argues that important consequences for the analysis of free trade areas (FTAs) follow from the observation that, with no transport costs, producer prices must be equalised across member countries of a FTA, even if external tariffs differ. In particular, the wellknown tariff externality of a FTA is exacerbated by internal trade deflection and competition for external tariff revenues. Consequently, a FTA will involve lower external tariffs than might otherwise be expected. We illustrate an extreme case of a FTA between identical partners wherein equilibrium, if it exists at all, is one of zero external tariffs.
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Suggested Citation

  • Richardson, Martin, 1995. "Tariff revenue competition in a free trade area," European Economic Review, Elsevier, vol. 39(7), pages 1429-1437, August.
    • Handle: RePEc:eee:eecrev:v:39:y:1995:i:7:p:1429-1437
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    as
    1. Martin Richardson, 2017. "Why a Free Trade Area? The Tariff also Rises," World Scientific Book Chapters, in: Dimensions of Trade Policy, chapter 6, pages 129-152, World Scientific Publishing Co. Pte. Ltd..
    2. Grossman, Gene M & Helpman, Elhanan, 1995. "The Politics of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 85(4), pages 667-690, September.
    3. Corden, W.M., 1984. "The normative theory of international trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 2, pages 63-130, Elsevier.
    4. Vousden,Neil, 1990. "The Economics of Trade Protection," Cambridge Books, Cambridge University Press, number 9780521346696, January.
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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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