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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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