DP14121 A Theory of Economic Unions

Author(s): Gino Gancia, Giacomo AM Ponzetto, Jaume Ventura
Publication Date: November 2019
Keyword(s): Economic unions, European integration, non-tariff barriers
JEL(s): D71, F15, F55, F62, H77
Programme Areas: Public Economics, International Trade and Regional Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14121

After decades of successful growth, economic unions have recently become the focus of heightened political controversy. We argue that this is partly due to the growth of trade between countries that are increasingly dissimilar. We develop a theoretical framework to study the effects on trade, income distribution and welfare of economic unions that differ in size and scope. Our model shows that political support for international unions can grow with their breadth and depth as long as member countries are sufficiently similar. However, differences in economic size and factor endowments can trigger disagreement over the value of unions between and within countries. The model is consistent with some salient features of the process of European integration and statistical evidence from survey data.