Pareto-Improving Trading Clubs Without Income Transfers

The authors show that, if the standard revenue and expenditure functions exist, any group of countries can engage in a Pareto-improving non-discriminatory tariff reform without income transfers, if there are more than two tradable goods and the initial tariff vectors of the member countries satisfy the nonproportionality condition. They then show that if these two conditions hold then countries can form a Pareto-optimal customs union. Depending on initial conditions, transfers may be necessary for the customs union to be Pareto-improving.