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Trade Theory, Analytical Models and Development

Essays in Honour of Peter Lloyd, Volume I

Edited by Sisira Jayasuriya

Trade Theory, Analytical Models and Development, comprises 11 essays offering new contributions on the following topics: trade and wages; factor endowments, factor mobility and political economy of trade; optimality of tariffs; measurement of welfare; customs union theory; endogenous mergers and tariffs; intra-industry trade; state trading enterprises and trade liberalisation; general equilibrium effects of e-Commerce, and trade; economic growth with production and consumption externalities; and environmental pollution and resource degradation.
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Chapter 5: Pareto-optimal customs unions with transfers

Mark Melatos and Alan Woodland


Mark Melatos and Alan Woodland* 1. INTRODUCTION A customs union constitutes a trade agreement or contract in which members commit to: (i) zero tariffs on intra-union trade, (ii) common external tariffs rates on trade with non-members, (iii) a formula for distributing common external tariffs revenue amongst members and (iv) a criterion for the determination of the common external tariffs. While the first two elements have received considerable attention in the literature, the latter two elements have not. As a result, little is known about how asymmetric customs union members select the common external tariffs and how they choose to share the common external tariff revenue among themselves. It is clear, however, that these decisions are closely related. The choice of common external tariff rates bears upon the customs union’s total tariff revenue, which must then be shared among members according to some mutually agreed set of transfers. This chapter is motivated by the fact that despite being observed, intraunion transfers have attracted surprisingly little attention in the customs union literature. Indeed, transfers play an important role in the most developed customs union of all – the European Union (EU). While the EU’s budget is tiny relative to the overall size of its member economies, concern over the financing of transfers and their allocation among members has proven to be a vexing issue. Almost immediately following its accession to the European Community in 1973, the United Kingdom (UK) complained about the relatively large net contributions it was...

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