An Elementary Tariff Reform for a Free Trade Area
| Author | Martin Richardson |
| DOI | http://doi.org/10.1177/00157325221107294 |
| Published date | 01 February 2023 |
| Date | 01 February 2023 |
| Subject Matter | Articles |
An Elementary Tariff
Reform for a Free
Trade Area
Martin Richardson1
Abstract
In this note I identify a simple Pareto-improving tariff reform for two countries in
a free trade area, motivated by the approach in Kemp and Wan (1976), involving
a move ‘towards’ a Kemp-Wan customs union.
JEL Codes: F02, F13, F15
Keywords
Tariff reform, free trade area, Pareto improvement
Introduction
In Murray Kemp’s vast academic oeuvre, his seminal paper with Henry Wan Jr.
on the formation of customs unions (CU henceforth; Kemp & Wan, 1976: KW
henceforth) is perhaps the most widely known and arguably the most inuential.
Their short (three page), elegant note demonstrates that, under the canonical con-
ditions of competitive general equilibrium, any two tariff-ridden countries could
form a CU and choose a common external tariff (CET) in a potentially globally
Pareto-improving way. By choosing the CET to hold the aggregate CU’s trade
with the rest of the world unchanged—the so-called ‘Vanek compensating tar-
iff’—the CU could leave the rest of the world unaffected by its formation, and
the member countries could then realise the gains to be had by equating intra-CU
prices. The great signicance of this theorem is that, by iterated application, it
indicates the existence of a pathway to global free trade through the successive
formation of these Pareto-improving CUs: if countries A and B form such a CU,
for example, we can then treat them as a single country, and the theorem implies
that they can join with, say, country C to form another such CU and so on. In
Article
Foreign Trade Review
58(1) 38–44, 2023
© 2022 Indian Institute of
Foreign Trade
Reprints and permissions:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/00157325221107294
journals.sagepub.com/home/ftr
1 Research School of Economics, The Australian National University, Canberra, Australia.
Corresponding author:
Martin Richardson, Research School of Economics, The Australian National University, Canberra ACT
2601, Australia.
E-mail: martin.richardson@anu.edu.au
To continue reading
Request your trial