On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions

This paper compares equilibrium outcomes of two games of trade liberalization. In the Bilateralism game, countries choose whether to liberalize trade preferentially via a customs union (CU ), multilaterally, or not at all. The Multilateralism game is a restricted version of the Bilateralism game in that countries cannot form CUs and can only undertake non-discriminatory trade liberalization. When countries have symmetric endowments, global free trade is the only stable equilibrium of both games. Allowing for endowment asymmetry, we isolate circumstances where the option to form CUs helps further the cause of multilateral liberalization as well as where it does not. (JEL F12, F13)