ABSTRACT
The traditional comparative static customs union theory emphasizes two contrasting forces on the production side: free trade between members and protection vis-à-vis the outside world. The elimination of obstacles to trade within the union results in trade creation, whereas the establishment of a protected home market throughout the entire customs union area leads to trade diversion. The net result depends on which of the two effects is the dominant one. In addition to the production effects, there may be a gain from integration on the consumption side - if consumers benefit from a price reduction on imports through the elimination of intra-union tariffs.
