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The political economy of noncompliance in customs unions

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  • Joshua C. Fjelstul

    (Department of Political Science and International Relations, 27212 The University of Geneva, Geneva, Switzerland
    ARENA Centre for European Studies, The University of Oslo, Oslo, Norway)

Abstract

States create customs unions to accrue consumer welfare gains. Given the incentives to cheat to protect domestic firms from foreign competition, they create regulatory regimes with international courts to manage noncompliance. I develop a formal model that explains how the politics of compliance in regulatory regimes systematically distorts the welfare gains that states accrue from developing customs unions. The model predicts that regulatory regimes are most effective at enforcing compliance (i.e., at reducing trade barriers) in industries with intermediate levels of firm homogeneity in terms of productivity. In highly homogenous industries, regulatory regimes are not effective because noncompliance is minimal enough that litigation is not cost-effective; in highly heterogenous industries, regulatory regimes are not effective because courts, concerned about noncompliance with their rulings, are unlikely to rule against the defendants, deterring the plaintiffs from bringing cases. The model also predicts the downstream consequences for the performance of individual firms and consumer welfare.

Suggested Citation

  • Joshua C. Fjelstul, 2023. "The political economy of noncompliance in customs unions," Journal of Theoretical Politics, , vol. 35(1), pages 31-57, January.
    • Handle: RePEc:sae:jothpo:v:35:y:2023:i:1:p:31-57
    DOI: 10.1177/09516298221130262
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