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Lobbying and Information Transmission in Customs Unions

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  • Rafael Lima
  • Humberto Moreira
  • Thierry Verdier

Abstract

This paper studies a customs union agreement when governments are subject to the pressure of special interest groups that have better information about the competitiveness of the industries they represent. We focus on the agreement’s effect on the structure of political influence. When joining a customs union, the structure of political pressure changes and with privately informed lobbies, a new effect emerges: the governments can use the information they learn from the lobby of one country to extract rents from the lobbies of the other country. We call this the “information transmission effect”. This effect enhances the governments’ bargaining power in a customs union and makes lobbies demand less protection. Thus, we find that information transmission increases the welfare of the agreement and decreases tariffs towards non-members. We also investigate the incentives for the creation of a customs union and find that information transmission makes such agreement more likely to be politically sustainable.

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Bibliographic Info

Paper provided by Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto in its series Working Papers with number 09_01.

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Date of creation: Oct 2008
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Handle: RePEc:fea:wpaper:09_01

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Related research

Keywords: preferential trade agreements; customs union; political economy; lobbying; asymmetric information;

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References

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  1. Martin Richardson, 1994. "Why A Free Trade Area? The Tariff Also Rises," Economics and Politics, Wiley Blackwell, vol. 6(1), pages 79-96, 03.
  2. Martimort, David & Moreira, Humberto Ataíde, 2004. "Common agency with informed principals," Economics Working Papers (Ensaios Economicos da EPGE) 551, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  3. Richardson, Martin, 1993. "Endogenous protection and trade diversion," Journal of International Economics, Elsevier, vol. 34(3-4), pages 309-324, May.
  4. David Martimort & Aggey Semenov, 2007. "Political Biases in Lobbying under Asymmetric Information," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 614-623, 04-05.
  5. Emanuel Ornelas, 2007. "Exchanging market access at the outsiders' expense: the case of customs unions," Canadian Journal of Economics, Canadian Economics Association, vol. 40(1), pages 207-224, February.
  6. Emanuel Ornelas, 2005. "Rent Destruction and the Political Viability of Free Trade Agreements," The Quarterly Journal of Economics, MIT Press, vol. 120(4), pages 1475-1506, November.
  7. Pravin Krishna, 1998. "Regionalism And Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 227-250, February.
  8. Ornelas, Emanuel, 2005. "Endogenous free trade agreements and the multilateral trading system," Journal of International Economics, Elsevier, vol. 67(2), pages 471-497, December.
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