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Abstract:

cover
CEP Discussion Paper
Is the WTO Article XXIV Bad?
Monika Mrázová, David Vines and Ben Zissimos
November 2010
Paper No' CEPDP1021:
Full Paper (pdf)

JEL Classification: F02; F13; F15


Tags: coalition formation game; customs union; protection; trade block; trade liberalization

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 CUs 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) more symmetric in size so more goods are subject to tariff distortions as they move between CUs; thus Article XXIV may be 'bad' for world welfare.