An Elementary Tariff Reform for a Free Trade Area

Published date01 February 2023
Date01 February 2023
Subject MatterArticles
An Elementary Tariff
Reform for a Free
Trade Area
Martin Richardson1
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
Tariff reform, free trade area, Pareto improvement
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 inuential.
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 signicance 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
Foreign Trade Review
58(1) 38–44, 2023
© 2022 Indian Institute of
Foreign Trade
Reprints and permissions:
DOI: 10.1177/00157325221107294
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.

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