DP368 | The Optimal External Tariff in an Enlarging Customs Union


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A customs union is enlarged by the addition of one or more new countries. What should be the consequential change in its common external tariff (CET)? The paper attempts to make this question precise and to apply it to the enlargement of the EC. In many simple trade models the optimal CET is always zero, which makes the question trivial. Various cases can be developed, however, in which a positive CET is optimal. Some of these are reviewed and their implications for customs union enlargement elucidated. A neutral enlargement, under which trade with the outside world is held constant, proves to be an important and enlightening reference case.