Cross-border Trade and Regional Integration: a Welfare Analysis.

After motivating the analysis by describing cross-border trade between Nigeria and its neighbours, this paper analyses the welfare effect of smuggling and of trade liberalisation. When smuggling occurs because of a tariff or an export tax, smuggling is detrimental if it entails some real ressource cost over and above the cost of official trade, and if it does not drive out official trade. If it does, then the trade creation effect of smuggling may offset its cost. With Pitt's specification (Pitt, 1981 and 1984), where official trade provides a cover for unofficial trade, the consumer surplus goes up thanks to smuggling. In all cases, the presence of smuggling enhances the case for trade liberalisation. In particular, it is shown that smuggling may be a useful complement to official trade in the case of the creation of a free trade area, as it makes the trade creation effect more likely to dominate the trade diversion effect. Lastly, it is shown that smuggling, by increasing the tradability of imperfectly tradable goods, strengthens the case for joining a monetary union.