Elsevier

Journal of Monetary Economics

Volume 109, January 2020, Pages 107-127
Journal of Monetary Economics

A theory of economic unions

https://doi.org/10.1016/j.jmoneco.2019.11.007Get rights and content
Under a Creative Commons license
open access

Highlights

  • Economic unions promote trade among their members by removing non-tariff barriers.

  • Economic unions lower the cost of living but may cause distributive conflict.

  • Differences in members’ size and factor endowments make economic unions controversial.

  • Workers in large countries and import industries gain the least from economic unions.

  • Survey data on support for the EU are consistent with the predictions of our model.

Abstract

After decades of successful growth, economic unions have recently become the focus of heightened political controversy. To understand why, we develop a theoretical model of the effects on trade, income distribution and welfare of economic unions that differ in size and scope. Our model shows that political support for international unions can grow with their breadth and depth provided member countries are sufficiently similar. However, differences in economic size and factor endowments can trigger disagreement over the value of unions. Our model is consistent with some salient features of the process of European integration and statistical evidence from survey data.

Keywords

Economic unions
Non-tariff barriers
European integration

JEL classification

F15
F55
F62
H77
D71

Cited by (0)

We thank Gene Grossman, Alexander Monge-Naranjo, and participants to the Carnegie-Rochester-NYU Conference on Public Policy “On the Border of International Cooperation” and to the 4th Bruneck Workshop on Political Economy for their useful comments. Ugur Yesilbayraktar provided excellent research assistance. We acknowledge financial support from the Centre de Recerca en Economia Internacional (CREI), through the European Research Council (ERC), under the European Union’s Horizon 2020 Programme, Grant Agreements 693512 (“Globalization, Economic Policy and Political Structure”) and 714905 (“Citizens, Institutions and Globalization”), the Spanish Ministry of Economy and Competitiveness (grants RYC-2013-13838 and SEV-2015-0563), the Generalitat de Catalunya through the CERCA program, and the Leverhulme Trust through a 2019 Research Fellowship.