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The Protectionist Bias of Duty Drawbacks: Evidence from Mercosur

In: Developing Countries in the World Economy

Author

Listed:
  • Olivier Cadot
  • Jaime de Melo
  • Marcelo Olarreaga

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 tariffs 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 tum 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.

Suggested Citation

  • Olivier Cadot & Jaime de Melo & Marcelo Olarreaga, 2015. "The Protectionist Bias of Duty Drawbacks: Evidence from Mercosur," World Scientific Book Chapters, in: Developing Countries in the World Economy, chapter 15, pages 359-380, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814494908_0015
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    2. Ianchovichina, Elena, 2004. "Trade policy analysis in the presence of duty drawbacks," Journal of Policy Modeling, Elsevier, vol. 26(3), pages 353-371, April.
    3. Calvo-Pardo, Hector & Freund, Caroline & Ornelas, Emanuel, 2009. "The ASEAN Free Trade Agreement: impact on trade flows and external trade barriers," LSE Research Online Documents on Economics 28602, London School of Economics and Political Science, LSE Library.
    4. Kuo‐I Chang & Kazunobu Hayakawa & Nuttawut Laksanapanyakul & Dionisius Narjoko & Ju Hyun Pyun & Francis Quimba, 2022. "Determinants of regional trade agreement utilisation: Evidence from multiple import countries in Asia," The World Economy, Wiley Blackwell, vol. 45(6), pages 1713-1736, June.
    5. Baldwin, Richard, 2010. "Unilateral tariff liberalisation," CEPR Discussion Papers 8162, C.E.P.R. Discussion Papers.
    6. Olarreaga, Marcelo & Kee, Hiau Looi & Silva, Peri, 2003. "Market Access for Sale: Latin America's Lobbying for US Tariff Preferences," CEPR Discussion Papers 4077, C.E.P.R. Discussion Papers.
    7. Siwage Dharma Negara & Dionisius A. Narjoko & Kazunobu Hayakawa, 2024. "Impacts of Tariff Rates on Input Source Choice: Evidence from Indonesia," The Developing Economies, Institute of Developing Economies, vol. 62(1), pages 28-44, March.
    8. By Kishore Gawande & Pravin Krishna & Marcelo Olarreaga, 2012. "Lobbying Competition Over Trade Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(1), pages 115-132, February.
    9. Elena Ianchovichina, 2007. "Are duty drawbacks on exports worth the hassle?," Canadian Journal of Economics, Canadian Economics Association, vol. 40(3), pages 881-913, August.
    10. Adriana Peluffo & Mauricio Suárez & Alvaro Brunini, 2022. "Industrial Policy in Uruguay: Which are the effects?," Asociación Argentina de Economía Política: Working Papers 4584, Asociación Argentina de Economía Política.
    11. Jai S. Mah, 2007. "Export Promotion Policies and Economic Development of China," International Area Studies Review, Center for International Area Studies, Hankuk University of Foreign Studies, vol. 10(1), pages 23-38, March.
    12. Mah, Jai S., 2007. "The effect of duty drawback on export promotion: The case of Korea," Journal of Asian Economics, Elsevier, vol. 18(6), pages 967-973, December.
    13. Matthew Grant, 2020. "Why Special Economic Zones? Using Trade Policy to Discriminate across Importers," American Economic Review, American Economic Association, vol. 110(5), pages 1540-1571, May.
    14. Gabrielyan, Georgi T., "undated". "Economics of Import Duty and Excise Tax Drawback," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258026, Agricultural and Applied Economics Association.
    15. García, Raffi E. & López Rago, Ricardo A., 2025. "Financial subsidies, female employment, and plant performance — Evidence from a quasi-experiment," Journal of Financial Stability, Elsevier, vol. 76(C).
    16. Tatsuo Hatta, 2018. "Revenue-Constrained Combination of an Optimal Tariff and Duty Drawback," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 13(1), pages 52-67, March.

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    Keywords

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    JEL classification:

    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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