Trade Creation and Trade Diversion in Tax Unions and Customs Unions

Abstract

The production effects of tax unions have recently been discussed and compared with the production effects of customs unions. The analysis of the production effects of tax unions, however, has been carried out within a complete specialisation model and under assumptions different from the corresponding assumptions employed in the analysis of the production effects of customs unions. As a result, some of the conclusions drawn from tax union analysis are not strictly comparable to those obtained from customs union analysis. This paper examines the production effects of tax unions within a noncomplete specialisation model and under assumptions similar to those employed in the theory of customs unions, and compares the results obtained in the two cases.

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