Chapter 10 Pareto-Improving Trading Clubs without Income Transfers

Abstract

Purpose – We ask how far the Kemp–Wan Pareto-improving result can hold without inter-country transfers.

Methodology/approach – Assuming that the standard revenue and expenditure functions exist, we consider tariff adjustments for some group of countries such that they makes member countries better off without affecting non-member countries (a la Kemp–Wan).

Findings – Any group of countries can engage in a Pareto-improving non-discriminatory tariff reform without income transfers, if (i) there are more than two tradable goods and (ii) the initial tariff vectors of the member countries satisfy the non-proportionality condition. We then show that if these two conditions hold then countries can form a Pareto-optimal customs union. Depending on initial conditions, transfers may be necessary for the customs union to be Pareto-improving.

Originality/value of paper – The Pareto-improving result of this chapter is based on tariff reform only.

Citation

Iwasa, K., Riezman, R. and Shimomura, K. (2008), "Chapter 10 Pareto-Improving Trading Clubs without Income Transfers", Tran-Nam, B., Van Long, N. and Tawada, M. (Ed.) Globalization and Emerging Issues in Trade Theory and Policy (Frontiers of Economics and Globalization, Vol. 5), Emerald Group Publishing Limited, Leeds, pp. 139-162. https://doi.org/10.1016/S1574-8715(08)05010-0