FREE-TRADE AGREEMENTS VERSUS CUSTOMS UNIONS

Until the advent of the North American Free Trade Agreement (NAFTA), a nalyses of preferential trading arrangements began by assuming a custo ms union (CU) with a common external tariff, and the differences betwe en customs unions and free trade agreements (FTAs) have been little an alyzed. This paper points to some of the differences between FTAs and customs unions, and shows that on welfare grounds a customs union is a lways Pareto-superior to an FTA. Moreover, the political economy of FT As will lead to more opposition to further multilateral trade liberali zation than will customs unions. (C) 1997 Elsevier Science B.V.