Deepening of Regional Integration and Multilateral Trade Agreements

We construct a three-country, two-bloc, multi-product trade model in which tariff agreements between customs union members are binding whereas inter-bloc tariff agreements are self-enforcing. Our main objective is to explore how the liberalization of trade between customs union members (i.e. the deepening of regional integration) affects the sustainability of tariff agreements with the rest of the world (ROW). We derive conditions under which Kemp¿Wan [Kemp, M.C. and H. Wan, Jr., 1976, An elementary proposition concerning the formation of customs unions, Journal of International Economics 6, 95¿97] adjustments in the external tariffs of union members result in self-enforcing tariff agreements with ROW and then use these adjustments to evaluate the general tariff-setting incentives of the two trading blocs.