Why don't more countries form Customs Unions instead of Free Trade Agreements? The role of flexibility

The vast majority of Preferential Trade Agreements (PTAs) formed are actually Free Trade Agreements (FTAs) rather than Customs Unions (CUs). This largely undocumented prevalence of FTAs relative to CUs is surprising given the traditional view of the literature is that PTA members should prefer CU formation over FTA formation because CU members gain a coordination benefit via setting a common external tariff. I suggest a novel explanation for this prevalence: FTAs possess a dynamic flexibility benefit because individual FTA members have the flexibility to form their own subsequent agreements whereas CU members must jointly engage in any future PTA formation. When the trade-off between the CU coordination benefit and FTA flexibility benefit drives the equilibrium, I show that a necessary and sufficient condition for multiple FTAs in equilibrium is that the FTA flexibility benefit dominates the CU coordination benefit. I also use the model to investigate the long standing building bloc-stumbling bloc issue.