Multilateral tariff cooperation during the formation of customs unions

We study the implications of customs-union formation for multilateral tariff cooperation. We model cooperation in multilateral trade policy as self-enforcing, in that it involves balancing the current gains from deviating unilaterally from an agreed-upon trade policy against the future losses from forfeiting the benefits of multilateral cooperation that such a unilateral defection would imply. The early stages of the process of customs-union formation are shown to alter this dynamic incentive constraint in a way that leads to a temporary ''honeymoon'' for liberal multilateral trade policies. We find, however, that the harmony between customs unions and multilateral liberalization is temporary: eventually, as the full impact of the emerging customs union becomes felt, a less favorable balance between current and future conditions re-emerges, and the liberal multilateral policies of the honeymoon phase cannot be sustained. (C) 1997 Elsevier Science B.V.