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Why don't more countries form Customs Unions instead of Free Trade Agreements? The role of flexibility

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  • James Lake

    (Southern Methodist University)

Abstract

In practice, Free Trade Agreements (FTAs) outnumber Customs Unions (CUs) by a ratio of 9 : 1. Nevertheless, the literature traditionally views CUs as optimal for members because CU members coordinate external tariffs. I show that a dynamic FTA flexibility benefit can help explain the prevalence of FTAs : individual FTA members have the flexibility to form their own future FTAs whereas CU members must jointly engage in future CU formation. Under asymmetry, even arbitrarily small degrees thereof, FTAs emerge in equilibrium if and only if the FTA flexibility benefit outweighs the CU coordination benefit.

Suggested Citation

  • James Lake, 2016. "Why don't more countries form Customs Unions instead of Free Trade Agreements? The role of flexibility," Departmental Working Papers 1601, Southern Methodist University, Department of Economics.
    • Handle: RePEc:smu:ecowpa:1601
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    References listed on IDEAS

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    1. Seidmann, Daniel J., 2009. "Preferential trading arrangements as strategic positioning," Journal of International Economics, Elsevier, vol. 79(1), pages 143-159, September.
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    Cited by:

    1. Lake, James & Yildiz, Halis M., 2016. "On the different geographic characteristics of Free Trade Agreements and Customs Unions," Journal of International Economics, Elsevier, vol. 103(C), pages 213-233.

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    More about this item

    Keywords

    Preferential Trade Agreement; Free Trade Agreement; Customs Union; coordination; flexibility; free riding; networks; farsighted.;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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