ABSTRACT
The welfare analyses of preferential trading arrangements have been characterized by generally inconclusive and messy results. In this chapter, I attempt to give order to the analysis of one important case: a union between two small countries. The analysis has two key advantages over the existing literature. First, the model employed is fully general in that it allows for goods that are exported and imported by both partners as well as those that are exported by one and imported by the other partner. Second, the results are derived for finite changes in tariff rates rather than being limited to infinitesimally small changes.
