This note argues that important consequences for the analysis of free
trade areas (FTAs) follow from the observation that, with no transport
costs, producer prices must be equalised across member countries of a
FTA, even if external tariffs differ. In particular, the well-known t
ariff externality of a FTA is exacerbated by internal trade deflection
and competition for external tariff revenues. Consequently, a FTA wil
l involve lower external tariffs than might otherwise be expected. We
illustrate an extreme case of a FTA between identical partners wherein
equilibrium, if it exists at all, is one of zero external tariffs.