ABSTRACT
The orthodox theory of customs unions demonstrates that integration can provide expanded opportunities for countries to engage in inter-industry specialization within a bloc, in accordance with comparative advantage, thus bringing about a rationalization of its production. As long as the benefits from rationalization in the form of trade creation are not outweighed by reduced specialization brought about by trade diversion between the bloc and the rest of the world, as a result of the bloc’s discriminatory common external tariff, resource allocation will be improved. By that means a onceand-for all increase in the income and welfare of the member states as a whole may be brought about. The theory assumes a perfectly competitive framework in which homogeneous products are produced by firms that lack market power and incur few or no transaction costs. The core theory-customs union analysis-also excludes inter-country factor mobility.
