Tariff creation and tariff diversion in a customs union: The endogenous external tariff of the EEC 1968 - 1983

Data from the EEC from 1968-1983 do not support the view that regional trading arrangements necessarily lead to increased endogenous protectionism toward outside countries. This paper applies previous theoretical work by both authors on the theory of endogenous protection and endogenous free riding to the European Economic Community (the EEC). We use data from 51 three-digit manufacturing industries to explain endogenous changes in the common external tariff of the EEC over the period 1968-1983. We proxy pre-and post-customs union formation using data from two of the three largest countries in the EEC (France and Italy). In this sample, the common external tariff of the EEC fell from 15 percent to 7.5 percent from 1968-1983, largely due to GATT negotiations. US tariffs also fell in half over this period. Our industry analysis indicates that the common external tariff rose by 1.7 percentage points from 1968-1983 because of "tariff creation," which was (1) increased political pressure from protectionists most harmed by the rapid growth in intra-EEC imports and (2) decreased free riding caused by increased industry concentration due to firm mergers stimulated by plant and firm economies of scale. We found that the common external tariff fell by 1.1 percentage points from 1968-1983 because of "tariff diversion," caused by (1) increased free riding within protectionist industry lobbies because of their operation within the larger political arena of the EEC and (2) decreased political pressure from those protectionists whose industries had grown rapidly thanks to the movement towards optimal country size and other customs union efficiencies.