The UTR versus CU Formation Analysis and Article XXIV

Abstract

In 1965, Cooper and Massell (Economic Journal 75: 742-7) showed that a policy of unilateral tariff reduction (UTR) was superior to the formation of a customs union (CU). Although their model was concerned with only static resource reallocation effects, many analysts treated the Cooper/Massell ‘criticism’ as if it applied to the entire CU formation issue. This was incomprehensible, especially when they themselves almost simultaneously developed a different model to demonstrate that two countries together can do more than each acting alone. Wonnacott and Wonnacott (1981,American Economic Review 71: 704-14) tried to revive the issue by claiming that the use of a three-country general equilibrium model with transportation costs and tariffs by the rest of the world could show that UTR need not dominate CU formation, but El-Agraa and Jones (2000,Applied Economics Letters 7: 301-4; Journal of Economic Integration 15: 239-59) have demonstrated that their claim is unwarranted, due to inadequacies in their model. This paper shows that the incorporation of WTO/GATT rules (Article XXIV) into an appropriately adjusted orthodox framework leads to the Wonnacott's conclusion.