THE THEORY OF CUSTOMS UNIONS: A GENERAL SURVEY11An earlier version of this paper was read before the Conference of the Association of University Teachers of Economics at Southampton, January 1959. I am indebted for comments and suggestions to G. C. Archibald, K. Klappholz and Professor L. Robbins

Publisher Summary This chapter presents a survey of the development of customs-union theory from Viner to date. However, the theory must be meant at least as an aid in interpreting real-world data, some space is devoted to a summary of empirical evidence relating to the gains from European Economic Union. The theory has been confined mainly to a study of the effects of customs unions on welfare rather than, for example, on the level of economic activity, the balance of payments or the rate of inflation. These welfare gains and losses, which are the subject of the theory, may arise from a number of different sources: (1) the specialization of production according to comparative advantage which is the basis of the classical case for the gains from trade; (2) economies of scale; (3) changes in the terms of trade; (4) forced changes in efficiency because of the increased foreign competition; and (5) a change in the rate of economic growth. The theory of customs unions has been almost completely confined to an investigation of (1) above, with some slight attention to (2) and (3), (5) not being dealt with at all, while (4) is ruled out of traditional theory by the assumption that production is carried out by processes which are technically efficient. The earliest customs-union theory was largely embodied in the oral tradition, for it hardly seemed worthwhile to state it explicitly, and was an example of an attempt to produce the former sort of conclusion.