Cooperative and competitive policies in the EU : The European Siamese twin?

With the completion of the internal market many possibilities for the EU member states to protect their markets against imports are restricted or even eliminated. This gives, however, member states the incentive to use other policy instruments. This paper analyzes the effect of liberalizing trade barriers on decentralized redistributive policies using a two-country model with an integrated commodity market. It shows that redistributive policies become more competitive, if further liberalization of markets takes place, while these markets are already relatively integrated. This leads to the interesting paradox that more cooperative trade policies imply more competitive redistributive policies. However, if markets are nearly not integrated, it is possible that liberalization reduces tax competition.