A Theory of Economic Unions

• Authors: Jaume Ventura, Giacomo Ponzetto and Gino Gancia.
• BSE Working Paper: 112207 | September 19
• Keywords: economic unions , non-tariff barriers , European integration
• JEL codes: F15, F55, F62, H77, D71, D78
• economic unions
• non-tariff barriers
• European integration

After decades of successful growth, economic unions have recently become the focus of heightened political controversy. We argue that this is partly due to the growth of trade between countries that are increasingly dissimilar. We develop a theoretical framework to study the effects on trade, income distribution and welfare of economic unions that differ in size ad scope. Our model shows that political support for international unions can grow with their breadth and depth as long as member countries are sufficiently similar. However, differences in economic size and factor endowments can trigger disagreement over the value of unions between and within countries. The model is consistent with same salient features of the process of European integration and statistical evidence from survey data.