Chapter 9 More (or Less) on Necessarily Welfare-Enhancing Free Trade Areas

Purpose – This chapter suggests that the value of the extension to free trade areas (FTAs) of the Kemp–Wan (KW) theorem on necessarily welfare-improving customs unions is undermined by its very rationale – the greater popularity of FTAs over customs unions for ‘political’ reasons. Methodology/approach – We discuss some intuition supported by partial equilibrium diagrammatic analysis and then present simulations of a global CGE model. Findings – We argue that this sort of FTA will likely be unattractive to potential member countries. We then observe that the external tariffs here and in KW will be identical for many goods but illustrate, in a partial equilibrium setting, a context in which there might be some difference between them. Nevertheless, our analysis suggests that there are reasons to expect some harmonisation of tariffs between member countries in this sort of FTA. Originality/value – We are the first to question the practical value of the extension of KW to FTAs. We also provide one of the few computable general equilibrium analyses of KW customs unions.