In Discussion Paper No. 1316, Research Fellow Alan Winters claims that the so-called "Kemp-Wan Theorem", introduced in 1976, has been widely misunderstood and misused in integration theory. Although 'Kemp-Wan' is now commonly cited as a basis for determining whether the creation of a customs union benefits the rest of the world, and is operationalized by asking whether the union has increased non-members' exports to members, Kemp and Wan never proposed such a test or criterion. They only extended James Meade's earlier findings in order to show that the members' trade with the rest of the world can be fixed by selecting a suitable common external tariff rather than relying on quantitative restrictions. However, in their extension only a freeze of non-member welfare was considered, not whether it would be higher or lower as a result of integration that opts for an external tariff rather than that which just left non-members indifferent. The paper suggests that, given the extreme generality of the model, it is difficult to see how it could have been more informative about non-member welfare.

Winters finds that non-member welfare can be related to their exports to the union in any model based on Kemp an Wan's apparatus, but not monotonically. The reason for that is that higher exports are only beneficial to welfare if they permit extra imports, and, therefore, extra consumption. Two further practical points are made: First, the share of member countries' exports or imports is immaterial: it is the absolute level of trade that matters. Second, integration occurs over time during which exogenous changes also occur. These exogenous changes can outweigh the effects of integration on trade flows.

Regionalism and the Rest of the World: The Irrelevance of the Kemp-Wan Theorem
L Alan Winters