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What's behind MERCOSUR's common external tariff?

Author

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  • Olarreaga, Marcelo
  • Soloaga, Isidro
  • Winters, Alan

Abstract

The theoretical literature on trade follows two different approaches to explaining the endogenous formation of customs unions: 1) The terms-of-trade approach, in which integrating partners are willing to exploit terms-of-trade effects. Using the terms-of-trade approach, one concludes that tariffs on imports from the rest of the world should increase after the formation of a regional bloc, because the market power of the region increases and terms-of-trade externalities can be internalized in the custom union's common external tariff. As the union forms, the"domestic market"gets larger and members'international market power increases. 2) The interest group pressures (political economy) approach, in which, for example, the customs union may offer the potential for exchanging markets or protection within the enlarged market. Using this approach, one would usually conclude that tariffs for the rest of the world decline after the custom union's formation-a rationale related to free-rider effects in larger lobbying groups. It is important to recognize the forces behind the formation of customs unions. Most researchers have focused on the second approach and neglected terms of trade as a possible explanatory variable. Both rationales explain a significant share of tariff information. Results, writes the author, suggest that both forces were important in formation of the Common Market of the Southern Cone (Mercosur). Terms-of-trade effects account for between 6 percent and 28 percent of the explained variation in the structure of protection. There is also evidence that the terms-of-trade externalities among Mercosur's members have been internalized in the common external tariff.

Suggested Citation

  • Olarreaga, Marcelo & Soloaga, Isidro & Winters, Alan, 1999. "What's behind MERCOSUR's common external tariff?," Policy Research Working Paper Series 2231, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2231
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Nicita, Alessandro & Olarreaga, Marcelo & Silva, Peri, 2013. "Cooperation in WTO's Tariff Waters," CEPR Discussion Papers 9529, C.E.P.R. Discussion Papers.
    2. Missios, Paul & Saggi, Kamal & Yildiz, Halis Murat, 2016. "External trade diversion, exclusion incentives and the nature of preferential trade agreements," Journal of International Economics, Elsevier, pages 105-119.
    3. L. Alan Winters, 2000. "Regionalism and Multilateralism in the Twenty-First Century," IDB Publications (Working Papers) 2188, Inter-American Development Bank.
    4. L. Alan Winters, 2000. "Regionalism and Multilateralism in the Twenty-First Century," IDB Publications (Working Papers) 8749, Inter-American Development Bank.
    5. Karacaovali, Baybars & Limão, Nuno, 2008. "The clash of liberalizations: Preferential vs. multilateral trade liberalization in the European Union," Journal of International Economics, Elsevier, pages 299-327.
    6. Cadot, Olivier & de Melo, Jaime & Olarreaga, Marcelo, 2000. "The Protectionist Bias of Duty Drawbacks and the New Regionalism," CEPR Discussion Papers 2559, C.E.P.R. Discussion Papers.
    7. Mattoo, Aaditya & Olarreaga, Marcelo, 2000. "Should credit be given for autonomous liberalization in multilateral trade negotiations?," Policy Research Working Paper Series 2374, The World Bank.
    8. Syropoulos, Constantinos, 2003. "Rules for the disposition of tariff revenues and the determination of common external tariffs in customs unions," Journal of International Economics, Elsevier, vol. 60(2), pages 387-416, August.
    9. Tavares, Samia, 2006. "Deeper Integration and Voting on the Common European External Tariff," MPRA Paper 960, University Library of Munich, Germany.
    10. Cadot, Olivier*de Melo, Jaime*Olarreaga, Marcelo, 2001. "Can duty-drawbacks have a protectionist bias? Evidence from MERCOSUR," Policy Research Working Paper Series 2523, The World Bank.
    11. Tavares, Samia, 2006. "The Common External Tariff in a Customs Union: Voting, Logrolling, and National Government Interests," MPRA Paper 959, University Library of Munich, Germany.
    12. Samia Tavares, 2006. "The political economy of the European customs classification," Public Choice, Springer, vol. 129(1), pages 107-130, October.
    13. Nuno Limão, 2016. "Preferential Trade Agreements," NBER Working Papers 22138, National Bureau of Economic Research, Inc.
    14. Dhingra, Swati, 2006. "Re-examination of the Mayer Median Voter Model of Trade Policy," MPRA Paper 892, University Library of Munich, Germany, revised 14 Nov 2006.

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