DP38 | Customs Union, Tariff Reform and Trade in Differentiated Products


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The paper analyses tax and tariff policy for trade between economies which each contain a monopolistically competitive industry producing differentiated products. The consequences of tax changes by a single country are examined, and the general desirability of taxing imports more heavily than domestically produced goods is established. Customs union theory is analysed by studying coordinated tax changes by a group of countries; circumstances under which customs union formation and enlargement will benefit members are found. Game theoretic techniques are used to investigate which countries will coalesce into a customs union.