Sequencing in customs union formation: Theory and application to the Eurasian economic union

Abstract

In the model of optimal sequencing in economic integration, an agenda setter chooses between two bargaining protocols that correspond to two different integration paths. With multilateral negotiations, the union is formed immediately, whereas with sequential negotiations, a core union is formed before all other countries in the region integrate. The latter is preferred if formation of a core union has negative externalities on a candidate country. The agenda setter improves her bargaining position, but an efficiency loss from delayed integration is incurred. We demonstrate that the threat of delayed entry will not be carried out if an open-rule protocol is available, i.e., if the agenda setter can propose to form a core union and amend this proposal before it is adopted. Yet, if bargaining is time consuming, this result can be overturned and there may be a delay that incurs a temporary efficiency loss. Our model explains the sequential formation of the Eurasian Customs Union.