Journal Issue: World Bank Economic Review, Volume 12, Issue 2
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Volume
12
Number
2
Issue Date
Journal Title
Journal ISSN
1564-698X
Journal
Journal
World Bank Economic Review
1564-698X
Journal Volume
Journal Volume
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Articles
Publication
Regional Integration as Diplomacy
(World Bank,
1998-05-01)
Regional integration agreements are
examples of second-best policies and have an ambiguous
impact on welfare. This article builds a model in which
regional integration agreements unambiguously raise welfare
by correcting for externalities. It assumes that trade
between neighboring countries raises trust between them and
reduces the likelihood of conflict. The optimum intervention
in that case is a subsidy on imports from the neighbor. The
article shows that an equivalent solution is for the
neighboring countries to tax imports from the rest of the
world that is, to form a regional integration agreement
together with some domestic taxes. The article shows that
(1) the optimum tariffs on imports from the rest of the
world are likely to decline over time; (2) deep integration
implies lower optimum external tariffs if it is exogenous;
(3) optimum external tariffs are higher before deep
integration and lower thereafter if deep integration is
endogenous; and (4) enlargement of bloc size (in terms of
symmetric countries) has an ambiguous impact on external
tariffs but raises welfare, and some form of domino effect exists.