Customs unions and economic communities: some examples

Kemp and Wan (1976) proved that nations forming customs unions can always implement a transfer system such that the formation of the unions is a pareto-improvement for the whole world. this seems to imply that customs unions would tend to grow until the world is free trade. this argument, however, does not take into consideration that a customs union may have an incentive to influence the world market equilibrium to its advantage. the present paper distinguishes between pure customs unions without transfers and economic communities with transfers. in a simple model examples are produces which show that under nash-equilibrium behaviour of tariff-setters only a small set of customs unions may be able to form (which may fall short of free trade) and not even all economic communities may be able to form.;