Free trade agreements versus customs unions

Until the advent of the North American Free Trade Agreement (NAFTA), analyses of preferential trading arrangements began by assuming a customs union (CU) with a common external tariff, and the differences between customs unions and free trade agreements (FTAs) have been little analyzed. This paper points to some of the differences between FTAs and customs unions, and shows that on welfare grounds a customs union is always Pareto-superior to an FTA. Moreover, the political economy of FTAs will lead to more opposition to further multilateral trade liberalization than will customs unions. (C) 1997 Elsevier Science B.V.