Can duty-drawbacks have a protectionist bias? Evidence from MERCOSUR
Duty drawback (or rebate) systems, reduce or eliminate the duties paid on imported intermediate goods, or raw materials used in the production of exports. When a firm imports an intermediate product for use in the production of an export good, tariff payments on the imported intermediate good are either waived (duty drawback), or returned to the producer once the final product is exported (rebate). These incentive systems are often justified on the grounds that they tend to correct the anti-trade bias imposed by high tariff levels. The problem with this line of reasoning is that it assumes that tariffs are predetermined policy variables; if they were, the easiest way to reduce their anti0trade bias would be to eliminate them. But this is rarely done because existing levels of protection correspond to a political economy equilibrium, difficult to modify in the presence of lobbying pressures. The authors show that in a political economy setting, where tariffs and duty drawbacks are endogenously chosen through industry lobbying, full duty drawbacks are granted to exporters that use imported intermediate goods in their production. This in turn decreases their incentives to counter-lobby against high tariffs on their inputs. Indeed, under a full duty drawback regime, tariffs on intermediate goods are irrelevant to exporters, because they are fully rebated. In equilibrium, higher tariffs will be observed on these goods. Creating a regional trading block, alters the incentives by eliminating duty drawbacks on intra-regional exports, which leads to lower tariffs for goods that intra-regional exporters use as inputs. Evidence from MERCOSUR suggests that eliminating duty drawbacks for intra-regional exports, would lead to increased counter-lobbying against protection of intermediate products. The authors estimate that without this mechanism, the common external tariff would have been 3.5 percentage points (25 percent) higher on average.
|Date of creation:||31 Jan 2001|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cadot, O & de Mela, J & Olarreaga, M, 1996. "Lobbying and the Structure of Protection," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 96.18, Institut d'Economie et Econométrie, Université de Genève.
- Pravin Krishna, 1998.
"Regionalism and Multilateralism: A Political Economy Approach,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 113(1), pages 227-251.
- Pravin Krishna, 1996. "Regionalism and Multilateralism: A Political Economy Approach," Working Papers 96-5, Brown University, Department of Economics.
- Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, vol. 52(2), pages 359-376, December.
- Cadot, Olivier & de Melo, Jaime & Olarreaga, Marcelo, 2001.
"Can bilateralism ease the pains of multilateral trade liberalization?,"
European Economic Review,
Elsevier, vol. 45(1), pages 27-44, January.
- Cadot, Olivier & de Melo, Jaime & Olarreaga, Marcelo, 1998. "Can bilateralism ease the pains of multilateral trade liberalization?," WTO Staff Working Papers ERAD-98-02, World Trade Organization (WTO), Economic Research and Statistics Division.
- Cadot, Olivier & de Melo, Jaime & Olarreaga, Marcelo, 1998. "Can Bilateralism Ease the Pains of Multilateral Trade Liberalization?," CEPR Discussion Papers 1878, C.E.P.R. Discussion Papers.
- Cadot, O. & de Melo, J. & Olarreaga, M., 1998. "Can Bilateralism Ease the Pains of Multilateral Trade Liberalization?," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 98.11, Institut d'Economie et Econométrie, Université de Genève.
- Veall, Michael R & Zimmermann, Klaus F, 1994. "Goodness of Fit Measures in the Tobit Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(4), pages 485-499, November.
- Grossman, Gene M & Helpman, Elhanan, 1994.
"Protection for Sale,"
American Economic Review,
American Economic Association, vol. 84(4), pages 833-850, September.
- Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 162, Princeton, Woodrow Wilson School - Public and International Affairs.
- Grossman, Gene & Helpman, Elhanan, 1993. "Protection for Sale," CEPR Discussion Papers 827, C.E.P.R. Discussion Papers.
- Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
- Gene M. Grossman & Elhanan Helpman, 1992. "Protection For Sale," NBER Working Papers 4149, National Bureau of Economic Research, Inc.
- Elhanan Helpman, 1995. "Politics and Trade Policy," NBER Working Papers 5309, National Bureau of Economic Research, Inc.
- Olarreaga, Marcelo & Soloaga, Isidro, 1998. "Endogenous Tariff Formation: The Case of Mercosur," World Bank Economic Review, World Bank Group, vol. 12(2), pages 297-320, May.
- Olarreaga, Marcelo & Soloaga, Isidro & Winters, Alan, 1999. "What's behind MERCOSUR's common external tariff?," Policy Research Working Paper Series 2231, The World Bank.
- Arvind Panagariya, 2000. "Preferential Trade Liberalization: The Traditional Theory and New Developments," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 287-331, June.
- Giovanni Maggi & Pinelopi Koujianou Goldberg, 1999. "Protection for Sale: An Empirical Investigation," American Economic Review, American Economic Association, vol. 89(5), pages 1135-1155, December.
- Wilfred J. Ethier, 1998. "Regionalism in a Multilateral World," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1214-1245, December.
- Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-519, September.
- Ethier, Wilfred J, 1998. "The New Regionalism," Economic Journal, Royal Economic Society, vol. 108(449), pages 1149-1161, July.
- Anne O. Krueger & Sarath Rajapatirana, 1999. "The World Bank Policies Towards Trade and Trade Policy Reform," The World Economy, Wiley Blackwell, vol. 22(6), pages 717-740, August.
- Panagariya, Arvind, 1990. "Input tariffs and duty drawbacks in the design of tariff reform," Policy Research Working Paper Series 336, The World Bank.
- Rodrik, Dani, 1995. "Political economy of trade policy," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 28, pages 1457-1494 Elsevier.
- Dickins, William T, 1990. "Error Components in Grouped Data: Is It Ever Worth Weighting?," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 328-333, May.