UTR vs. CU Formation: The Missing CET

UTR vs. CU Formation: The Missing CET

In 1965, Cooper and Massell (CM), using a partial-equilibrium trade model, reached the conclusion that a policy of unilateral tariff reduction (UTR) is superior to the formation of a customs union (CU). Wonnacott and Wonnacott (WW) challenged this conclusion in 1981 by claiming to show that UTR need not dominate a CU. In this article, we demonstrate that the incorporation of a common external tariff in WW?s CU model not only restores the validity of CM?s conclusion but also leads to the new proposition that the mutual adoption of non-discriminatory free trade policies is superior to UTR. (JEL Classifications: F13, F02)