ENDOGENOUS FORMATION OF CUSTOMS UNIONS UNDER IMPERFECT COMPETITION - OPEN REGIONALISM IS GOOD

Consider an environment in which ex-ante symmetric countries can form customs unions freely. What are the welfare effects on member and non- member countries of the formation of welfare-maximizing customs unions ? What are the properties of stable customs-union structures? Can one design a rule of customs-union formation which, supports global free t rade as an equilibrium outcome? I show that the formation of customs u nions improves the aggregate welfare of member countries but reduces t he welfare of non-member countries. Regional customs unions are steppi ng stones toward global free trade under the 'open regionalism' rule b ut can be stumbling blocks against global free trade under the 'unanim ous regionalism' rule.