Customs Unions and Potential World Welfare: a Proof of Viner's Conjecture

Abstract

Fifty years ago, Viner conjectured that customs unions may reduce the potential world welfare. The purpose of this note is to prove his conjecture rigorously using a simple and straightforward method. With respect to normative economics, this requires to show the possibility that, consecutively to a customs union (or a free trade area), the welfare of any arbitrarily country cannot increase while the welfare of all other countries is held unchanged through assumed international transfers. In order to show this, we construct a model of a world economy where inter-country compensations actually take place and we use it to provide numerical exemples. It is further shown that the deterioration of the potential world welfare may occur even if there is no trade diversion in the Vinerian sense, since substitution effects in consumption are the only cause of welfare changes in our model. JEL Classifications : F13, F15