Is the WTO's Article XXIV Bad?
Monika Mrazova, David Vines
Ben Zissimos
Abstract
This paper shows that the WTO’s Article XXIV increases the likelihood of free trade, but may worsen world welfare when free trade is not reached and customs unions (CUs) form. We consider a model of many countries. Article XXIV prevents a CU from raising its common external tariff, which makes CU formation less attractive and explains why free trade is more likely. In an equilibrium where two CU’s do form, one is necessarily larger than the other. We show that Article XXIV has a composition effect on CU formation, whereby CUs are (endogenously) less asymmetric in size so more goods are subject to tariff distortions as they move between CUs; thus Article XXIV may be ‘bad’ for world welfare.
Keywords: Coalition Formation Game, Customs Union, Protection, Trade Block, Trade Liberalization
Date: December 2008 | Reference number(s): 417
Series: Department of Economics Discussion Paper Series
JEL Classifications: F02, F13, F15