Foreign Technology and Customs Unions: Trade Creation and Trade Diversion

Abstract

This article analyses the welfare implications of the customs unions in the presence of multinational corporations for a less than fully employed small open economy. The traditional two‐sector model, with a specific factor for the multinational corporation, is employed for this purpose. This article suggests that both trade creations I and II improve the social welfare and employment of the small open economy if the multinational sector is relatively capital‐intensive. However, the welfare and the employment effects of trade diversion I are ambiguous whereas trade diversion II affects employment level negatively. These results are in contrast with the previous studies on the theory of customs unions.

Citation

Beladi, H. and Samanta, S.K. (1990), "Foreign Technology and Customs Unions: Trade Creation and Trade Diversion", Journal of Economic Studies, Vol. 17 No. 6. https://doi.org/10.1108/EUM0000000000147