Foreign Technology and Customs Unions: Trade Creation and Trade Diversion Available to Purchase

This article analyses the welfare implications of the customs unions in the presence of multinational corporations for a less than fully employed small open economy. The traditional two‐sector model,with a specific factor for the multinational corporation, is employed for this purpose. This article suggests that both trade creations I and II improve the social welfare and employment of the small open economy if the multinational sector is relatively capital‐intensive. However,the welfare and the employment effects of trade diversion I are ambiguous whereas trade diversion II affects employment level negatively. These results are in contrast with the previous studies on the theory of customs unions.