The Adjustment of External Tariffs in the Kemp-Wan-Grinols Compensation Scheme

Abstract

This paper considers the adjustment of external tariffs when two countries integrate and implement the Kemp-Wan-Grinols compensation scheme. Attention is also paid to the restrictions set by Article XXIV of GATT. This paper shows how the external tariffs would change in a three-good, three-country model under the assumption of gross substitutability. The results are sensitive to the initial trade pattern. In particular, they depend on the number of goods initially traded between the member countries. The analysis can be extended to a multi-commodity model if the preferences of the countries have identical CES representation.