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The Protectionist Bias of Duty Drawbacks and the New Regionalism

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  • Cadot, Olivier
  • de Melo, Jaime
  • Olarreaga, Marcelo

Abstract

In a political-economy setting where tariffs and duty drawbacks are endogenously chosen through industry lobbying, it is shown that full duty-drawbacks are granted to exporters who use imported intermediates in their production. This in turn decreases their incentives to counter-lobby against high tariff on their inputs. In equilibrium, higher tariffs will be observed on these goods. The creation of a regional block will change the political equilibrium. Duty-drawbacks will be eliminated on intra-regional exports, which in turn will lead to lower tariffs for goods used as inputs by intra-regional exporters. Evidence from Mercosur suggests that the elimination of duty-drawbacks for intra-regional exports, led to increased counter-lobbying by users of intermediate products. In its absence the common external tariff would have been on average 3.5 percentage points (25 percent) higher.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2559.

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Date of creation: Sep 2000
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Handle: RePEc:cpr:ceprdp:2559

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Related research

Keywords: Duty-Drawbacks; Mercosur; New Regionalism; Political-Economy;

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References

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  1. Olarreaga, Marcelo & Soloaga, Isidro & Winters, Alan, 1999. "What's behind MERCOSUR's common external tariff?," Policy Research Working Paper Series 2231, The World Bank.
  2. Pravin Krishna, 1998. "Regionalism And Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 227-250, February.
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