RESEARCH AND ANALYSIS
Member-Heterogeneity and the Common External Tariff in a Customs Union
Subhayu Bandyopadhyay, Sajal Lahiri and Suryadipta Roy
A recurrent theme in the literature on preferential trading agreements (PTAs) is whether these are “stepping stones” or “stumbling blocks” to multilateral trade integration. The answer to a great extent lies in the level of the externals tariffs set in a PTA. The ongoing enlargement of the European Union (EU) relates to this question. What started as the European Coal and Steel Community among Belgium, France, Germany, Italy, Luxembourg and the Netherlands in the 1950s has proceeded to absorb countries like the Czech Republic, Cyprus, Estonia, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia in its fold. Bulgaria, Romania, and Turkey are potential candidates for further integration of the EU. The expansion of the EU has brought together countries that are increasingly disparate from one another in economic size as well as in their political institutions. Keeping the EU in mind, we (Bandyopadhyay, Lahiri and Roy, 2011) have recently examined the implication of this increasing asymmetry on the level of the common external tariff (CET) of a Customs Union (CU). The rest of this piece highlights the findings of that paper.
The role of domestic import-competing producer lobby groups in influencing the CET in a CU has been extensively analyzed in the literature. One of the approaches in this area has been to model lobbying as a directly unproductive rent-seeking activity (DUP) and to assume an exogenously specified tariff-generating function. We complement this strand of the literature by providing a model that endogenizes the tariff formation process. Another notable fact is the presence of widespread cross-country lobbying in the EU. Organizations like EuroCommerce, EuropaBio, and Friends of Europe are active in EU-wide lobbying. Important contributions such as Schiff and Winters (2003) have voiced concern about cooperation between country-specific lobby groups which may engender cross-border lobbying. We allow for such cross-border lobbying and investigate its effect on the level of the CET.
Our paper explicitly considers the effect of asymmetry among member nations of a CU in the lobbying process, and its resulting impact on the CET. Although we consider economic asymmetry in the context of size differences between member nations, the focus is on political asymmetry. The latter can stem from two factors. First, the greater the power (influence) of a government (or its representatives) in the central tariff-making body, the greater is the gain for the lobbyists from concentrating their activities on that particular government. For example, in the context of the EU, it may make more sense for producers to lobby the French or the German governments more aggressively, rather than lobby the less influential members like Malta or Lithuania. The second type of political asymmetry we consider is the susceptibility of a member government to lobbying. If a government is more easily convinced to support a lobbying group’s interests, we consider that government to be more susceptible to lobbying.
The analysis reveals that political asymmetry in either dimension (i.e., relative influence of a government in the CU, or susceptibility of a government to lobbying) tends to raise the CET. The interplay of economic asymmetry with political asymmetry is more nuanced. If a nation has a larger economy, it can potentially contribute to larger deadweight losses due to the CET to the union. In such a situation of preexisting economic asymmetry, greater political symmetry can be counterproductive. The important message of this contribution is that a Customs Union agreement between disparate nations is potentially more problematic compared to an agreement between similar nations.
Subhayu Bandyopadhyay, Subhayu Bandyopadhyay is a Research Officer in the Federal Reserve Bank of St. Louis, and a Research Fellow at IZA, Bonn. His recent contributions are in the areas of international trade and development, and the economics of terrorism.
Sajal Lahiri, PhD from the Indian Statistical Institute (1977); worked at the University of Essex (1978-2002); since 2002 holds an endowed chair at the Southern Illinois University Carbondale. Written extensively on issues related to international and development economics; was a member of the Restrictive Practices Court in the UK to hear a case on Retail Price Maintenance involving medicaments.
Suryadipta Roy is Assistant Professor at the Department of Economics, High Point University, High Point, North Carolina, U.S.A.