Tariffs, Protection and Economic Integration

Abstract

This paper investigates the policy and welfare implications of forming an economic region in the context of a Cournot duopoly model. Some theoretical results are obtained. First, the economic region will lower the external tariff (against nonpartner countries) less than its pre-integration level when a sufficiently large subsidy on the imports from the partner is carried out. Second, economic integration will reduce the nonpartner country’s welfare. Third, although the region will still gain from integration even under some partial trade liberalization regimes, complete trade liberalization within the region will lead to higher regional welfare. Finally, trade liberalization within the region will improve the welfare of the world as a whole.