Tariff revenue sharing rules in a customs union: a new methodology applied to the MERCOSUR case

Mechanisms for sharing the common tariff revenue in a customs union have received little attention in the literature (Syropoulus, 2003). Comparative analyses show that in past and current customs unions two main mechanisms are been used: generals rules and common funds. In this paper, a new mechanism which is fiscally neutral is developed, based on the final consumption criterion. The new methodology computes the extrazone imports and the common tariff revenue incorporated in intrazone trade both directly and indirectly. It extends the methodology of Lumega-Neso, Olarreaga and Schiff (2005) which was developed in a different context (measuring the effects of trade opening on technical progress). The technique developed here employs input-output tables together with observed trade flows, and is applied in the case of MERCOSUR. This methodology is useful not only because it offers a new option to policymakers but also because it leads to a new characterization of interregional trade flows. The paper derives interesting results in this respect. Intraregional trade in MERCOSUR comprises mainly locally produced goods with little extrazone import content, though there are important differences among MERCOSUR members. Brazil’s intrazone exports incorporate the most extrazone imports and hence should be the main net contributor to the compensation fund created by the proposed mechanism.