Endogenous formation of customs unions under imperfect competition: open regionalism is good

Consider an environment in which ex-ante symmetric countries can form customs unions freely. What are the welfare effects on member and non-member countries of the formation of welfare-maximizing customs unions? What are the properties of stable customs-union structures? Can one design a rule of customs-union formation which supports global free trade as an equilibrium outcome? I show that the formation of customs unions improves the aggregate welfare of member countries but reduces the welfare of non-member countries. Regional customs unions are stepping stones toward global free trade under the ‘open regionalism’ rule but can be stumbling blocks against global free trade under the ‘unanimous regionalism’ rule.