Essays in Honour of Peter Lloyd, Volume I
Edited by Sisira Jayasuriya
5. Pareto-optimal customs unions with transfers 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...
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