ABSTRACT
Kemp and Wan (1976, 1986) showed that, given any initial competitive but tariff-ridden world equilibrium, it is possible for any subset of two or more countries to form a customs union with a common tariff vector and with compensatory lump sum intra-union transfers such that, in an associated world equilibrium, no individual, whatever his country of residence, is made worse off and such that, if a strict convexity condition on preferences is satis®ed, all individuals within the customs union are better off.1 However Kemp and Wan assumed that excluded or non-member countries do not respond to the formation of the union by adjusting their tariffs; the latter are maintained at their pre-union levels. Evidently, the assumption is quite restrictive.
