Using the influence-driven approach to endogenous trade-policy determination, we show how a free-trade agreement (FTA) with rules of origin can work as a device to compensate losers from trade liberalization. The FTA constructed in this paper is characterized by external tariff structures that are negatively correlated across member countries, ensuring efficiency gains and, through reduced average protection, compatibility with the multilateral trading system’s requirements. It is also politically viable and we demonstrate that, in the countries concerned, governments are willing to include its formation in the political agenda even though, in equilibrium, political contributions from producer lobbies decline after the agreement.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1878.
Find related papers by JEL classification: F11 - International Economics - - Trade - - - Neoclassical Models of Trade F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations F15 - International Economics - - Trade - - - Economic Integration
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