Macroeconomics of Integration

We have seen that it is now a clearly established result of the orthodox theory of international economic integration that, given a world plagued with tariffs, the potential welfare level for the whole of the customs union (CU) is higher than the sum of the welfare levels available to countries following unilateral policies. Of course, it is quite possible, as whenever the gains from collusive action are contemplated, that the political feasibilities for the actual distribution of the gains may not prove sufficient to ensure that all the participants believe that they have received a fair share of those gains or even to ensure that each single participant does in fact benefit compared to the possibilities available to that country through unilateral action. Similarly, although the theoretical potential superiority of membership of a CU (likewise, the enlargement of existing CUs) has been established, it may be the case that constraints on policy choice at the appropriate level of economic integration cause actual policies within the union to fall further away from the theoretically optimal configuration than would be the case for purely national policies. It then follows that a second-best case could be made for withdrawal from a CU [as was proposed by the British Labour Party in its Manifesto for the 1983 general election and as has happened in the case of Greenland in relation to the European Community (EC)] on the empirical argument, which would have to be carefully evaluated in each case, that, within the existing constraints of policy-making, attainable unilateral action may be superior to the results achieved by continued membership of the union.