AbstractWe construct a model of customs unions in. which countries charge optimal tariffs. Customs unions internalize the externality that exists whenever two countries import the same good. Also, customs unions make several countries into one large unit with more market power. Big customs...

AbstractIt is well known that large countries can manipulate the terms of trade to their advantage by using tariffs. It is widely believed, however, that this invites retaliation, and that the post-retaliation equilibrium leaves all countries worse off than they would be at free trade. We...