ABSTRACT
In Chapters 2 and 3 the basic economic theory of customs unions and free trade areas has been outlined. This chapter is mainly concerned with the implications of a problem that has been implicit in that presentation but that has not been addressed up to this point. On the assumptions of the orthodox model, the basic theory as developed by Viner, Meade and Lipsey fails to provide an economic rationale for the formation of customs unions. This is because, apart from the terms-of-trade argument, the grounds on which it can be shown that a customs union may be superior to a non-discriminatory tariff are precisely those on which customs unions and free trade areas can themselves be shown to be necessarily inferior to unilateral tariff reductions and free trade.
