Customs Unions among Producing Countries with Different Costs
Jose Mendez-Naya, Tomas Gomez-Arias
The effects of production cost asymmetries on the sustainability of customs unions among producing countries are investigated using a homogeneous-product Cournot oligopoly model, in which three producing countries subsidize exports of an homogeneous good to a consumer country that imposes a tariff on imports. It is found that the only sustainable customs union is the one formed by the three-member customs union. However, although the said customs union will be in equilibrium if utility transferences among member countries are allowed, it could not be in equilibrium if such transferences are not allowed.