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Trade Policy Determinants and Trade Reform in a Developing Country

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  • Baybars Karacaovali

    ()
    (Department of Economics, University of Hawaii)

Abstract

In this paper, I start out with a standard political economy of trade policy model to guide the subsequent estimation of the determinants of trade policy in a developing country. I carefully test the model with Colombian data from 1983 to 1998 accounting for endogeneity and omitted variable bias concerns and then expand it empirically in several directions. I show that it is important to control for the impact of a drastic trade reform shock that affects all sectors and disentangle its effect from preferential trade agreements (PTAs). I find that protection is higher in sectors that are important exports for preferential partners which may be seen as a stumbling block effect of PTAs for Colombia. I also relax the assumption of fixed political weights that measure the extra importance of producers' welfare relative to consumers in the government objective. I measure the impact of sectoral characteristics on tariffs indirectly through political weights as a novel alternative to nonstructurally estimating them as determinants of protection. Accordingly, I obtain more realistic estimates for the political weights further contributing to the literature.

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File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_11-15.pdf
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Bibliographic Info

Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 201115.

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Length: 35 pages
Date of creation: 01 Nov 2011
Date of revision:
Handle: RePEc:hai:wpaper:201115

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Keywords: Political economy of trade policy; trade liberalization; preferential trade agreements; empirical trade;

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  8. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
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  11. Baybars Karacaovali, 2010. "Free Trade Agreements and External Tariffs," Fordham Economics Discussion Paper Series dp2010-03, Fordham University, Department of Economics.
  12. Matschke, Xenia N. & Sherlund, Shane M, 2003. "Do Labor Issues Matter In The Determination Of U.S. Trade Policy? An Empirical Reevaluation," Santa Cruz Department of Economics, Working Paper Series qt0sn637k8, Department of Economics, UC Santa Cruz.
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  20. Nicita, Alessandro & Olarreaga, Marcelo, 2001. "Trade and production, 1976-99," Policy Research Working Paper Series 2701, The World Bank.
  21. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2007. "Enhanced routines for instrumental variables/generalized method of moments estimation and testing," Stata Journal, StataCorp LP, vol. 7(4), pages 465-506, December.
  22. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
  23. Yoto V. Yotov, 2010. "Trade-Induced Unemployment: How Much Do We Care?," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 972-989, November.
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