On Discriminatory vs. Non-Preferential Tariff Policies

In a recent paper published in this JOURNAL, Cooper and Massell [1] have argued that “customs union is necessarily inferior to an appropriate policy of non-preferential protection” (p. 745). This conclusion, the authors maintain, emerges naturally from the separation of the effect of customs union into two exhaustive components, the one a tariff reduction component and the other a pure trade diversion component. As the terms themselves suggest, the former incorporates the single potential gain from customs union.These results depend crucially upon the assumption that the union is small and therefore incapable of influencing the terms of trade. Thus, the possibility that dominant terms-of-trade effects may endow the union with certain favourable outcomes which are not otherwise attainable need not be considered. It is the object of the present note to investigate the relevance of changes in the terms of trade to the conclusions reached by Cooper and Massell. It will turn out that even within the context of a model which resembles in most respects the one used by the authors, a positive terms-of-trade effect may indeed be dominant. However, and more important, it will be suggested that the relevant alternative to customs union is not unilateral, non-preferential tariff policy, but some form of international collusion. In the light of the latter, customs union may present the only effective solution to the problems of control and enforcement of “collective” policies.