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4 J. Common Mkt. Stud. 1 (1965-1966)

handle is hein.journals/jcmks4 and id is 1 raw text is: CUSTOMS UNIONS AND LATIN AMERICAN INTEGRATION By KEffH GRiIN and RICARDO FFRENCH-DAVIS THE essay is divided into four parts. Part I consists of a short section describing optimum and sub-optimum conditions and the relationship of the theory of the 'second-best' to the theory of customs unions. In Part II we consider the theoretical sources of an increase in economic welfare resulting from the creation of various types of integration. Both once-for-all and continuous gains are treated. Part M is devoted to a discussion of the problem of dynamic adjustment and the policy steps necessary to prevent each of the member nations from experienc- ing a decline in welfare. Thus the focus is on the distribution of the benefits of integration. In the final section, Part IV, we discuss the applicability of the theory to the Latin American case. I Given two assumptions, viz. (i) the international immobility of factors of production, and (ii) the condition in all countries that prices of goods equal their marginal social cost, and this in turn equals the consumers' marginal social valuation of goods, it can be claimed accurately that free trade will provide the marginal conditions necessary for the achievement of economic efficiency. Under these circumstances trade will be at an optimum when the ratios of prices of all com- modities are the same in every country.' The satisfaction of the above conditions is enough to ensure that production and effort will be at the optimum. Production will take place on, and not within, the trans- formation curve. Thus free trade is the allocation ideal. It is the optimum solution to international efficiency.2 In the real world, of course, there are commonly considerable divergences between marginal values and costs. Paradoxically, it is often true that a single movement toward free trade, i.e. a reduction in the divergence between marginal values and costs, will not lead to an increase in economic efficiency and welfare, but may reduce it. This is so because we usually change only one policy at a time. Previous changes become parameters for the purpose of this decision. It then becomes possible for a reduction in a particular divergence from the optimum to lead to an increase in the rates of divergence. Given several divergences between marginal values and costs, the maintenance 1

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