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Free Trade Agreements and External Tariffs

Author

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  • Baybars Karacaovali

    (Fordham University, Department of Economics)

Abstract

There has been a proliferation of preferential trade agreements within the last two decades. In this paper I analyze the effects of free trade agreements (FTAs) on external tariffs under a political economy setup. I extend the Grossman and Helpman (1995) model by determining tariff rates endogenously instead of assuming they are fixed during or after the formation of FTAs. I show that for an exogenously established FTA, the tariff rates that apply to non-members essentially decline once the FTA is formed. More importantly, I investigate the interaction between endogenous tariff determination and the feasibility of an FTA. I find that the expectation of tariff reductions under endogenous tariffs makes an otherwise feasible FTA under fixed tariffs become infeasible. However, if domestic import-competing sectors are relatively smaller, an FTA is more likely to be feasible as compared to fixed tariffs.

Suggested Citation

  • Baybars Karacaovali, 2010. "Free Trade Agreements and External Tariffs," Fordham Economics Discussion Paper Series dp2010-03, Fordham University, Department of Economics.
  • Handle: RePEc:frd:wpaper:dp2010-03
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    References listed on IDEAS

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    Cited by:

    1. Baybars Karacaovali, 2011. "Trade Policy Determinants and Trade Reform in a Developing Country," Fordham Economics Discussion Paper Series dp2011-03, Fordham University, Department of Economics.
    2. Baybars Karacaovali, 2012. "Trade Policy Determinants and Trade Reform in a Developing Country: The Case of Colombia," Working Papers 201220R, University of Hawaii at Manoa, Department of Economics.

    More about this item

    Keywords

    Free trade agreements; political economy of trade policy; trade liberalization; feasibility;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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