Enlargement and Common External Tariff in a Political-Economic Model of Customs Union

Abstract

We present a model with three blocks of nations: two of the blocks are members of a Customs Union (CU) and maintain a common external tariff (CET) on the third (non-member). One of the member blocks is a block of new entrants. The producing lobby is assumed to be union-wide and lobbies governments of both blocks to influence the CET. The CET is determined jointly by the CU. We follow the political support function approach, where the CU seeks to maximize a weighted sum of the constituents' payoff functions. In this framework, we find the relationship between the CET and the average level of capital stock owned by the protected sector in the block of new entrants. We find that the CET is unambiguously larger if the new entrants have a larger stock of capital.