Trade-Diverting Free Trade Agreements, External Tariffs, and Feasibility
AbstractThere has been a proliferation of preferential trade agreements within the last two decades. This paper analyzes the effects of free trade agreements (FTAs) on external tariffs in small economies where protection decisions are made politically. It extends the Grossman and Helpman (1995) model by determining tariff rates endogenously instead of assuming they are fixed during or after the formation of FTAs. We show that when an FTA is established, the tariff rates that apply to non-members essentially decline. More importantly, we investigate the interaction between endogenous tariff determination and the feasibility of an FTA. We find that the expectation of tariff reductions under endogenous tariffs could make an otherwise feasible FTA if tariffs were fixed become infeasible. However, if domestic import-competing sectors are relatively smaller and the government places a significant weight on political contributions relative to social welfare, an FTA with endogenous tariffs may be more likely to be feasible than an FTA assumed to fix external tariffs.
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Bibliographic InfoPaper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 201321.
Length: 32 pages
Date of creation: Dec 2013
Date of revision:
Find related papers by JEL classification:
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- F15 - International Economics - - Trade - - - Economic Integration
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