Free Trade Agreements , Customs Unions , and the Dynamics of Political Influence

This paper analyses the choice between a customs union (CU) and a free trade agreement (FTA) based on the dynamics of political influence induced by the two agreements. An FTA preserves the maximum future discretion a government might have over its trade policy in a trade agreement, but a CU commits the government to a particular external trade policy. For this reason, if government receives any rents from influence activities, those rents are likely to arrive in one large lump-sum in the case of a CU, but in a steady stream in the case of an FTA. A government with a short expected lifespan in office will tend to prefer a CU, with which it can lock successor governments into a particular trade policy, and collect the fee up front from the private sector. However, governments expecting a long life in office will prefer the steady stream of rents accruing from an FTA, especially if there is a high degree of turnover in the private sector.