Customs Unions and Free Trade Areas

Abstract

This paper compares free trade areas and customs unions in terms of their potential to liberalize trade. While neither arrangement is shown to be unambiguously preferable, this paper generates specific conditions that determine when customs unions are preferred to free trade areas. The rank ing of the two arrangements depends on how common external tariffs are set in customs unions, the restrictiveness of rules of origin in free trade agreements, and the original tariff levels among the member coun tries. • JEL Classification: F13 •