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Did the Multi-fiber Agreement Make the NAFTA Politically More Acceptable? A Theoretical Analysis

  • Arvind Panagariya

    (University of Maryland)

  • Rupa Dutta Gupta

    (IMF)

The central question addressed in this paper is whether the presence of the MFA made the NAFTA politically more acceptable. Assuming that the government maximizes a weighted sum of welfare and producer profits, we derive four key results. First, taking the initial level of trade restriction as exogenously given, it is possible for an FTA to be endorsed by both parties under the MFA-like quota in one country though it is unambiguously rejected under a tariff that provides equal protection. Second, if the initial MFA quota is itself chosen endogenously, as long as all quota rents accrue to exporting countries, the quota is set so as to yield either autarky or free trade. Third, an intermediate outcome can obtain if quota rents are shared between the trading partners as is true, for example, under a tariff quota. Depending on the degree of the government’s bias in favor of producers, this outcome may be more or less restrictive than that obtained under a tariff. Finally, assuming parameter values that give rise to the intermediate outcome initially, it remains possible for an FTA to be endorsed under the MFA-type quota when it is turned down by one of the potential partners under a tariff. But it is now also possible for the opposite to happen: an FTA that is endorsed under a tariff may be turned down under the MFA-type quota.

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Paper provided by EconWPA in its series International Trade with number 0308010.

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Length: 345 pages
Date of creation: 18 Aug 2003
Date of revision:
Handle: RePEc:wpa:wuwpit:0308010
Note: Type of Document - Tex/WordPerfect/Handwritten; prepared on IBM PC - PC-TEX/UNIX Sparc TeX; to print on HP/PostScript/Franciscan monk; pages: 345,395,4323247 ; figures: included/request from author/draw your own
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  1. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  2. Bond, Eric W. & Syropoulos, Constantinos, 1996. "The size of trading blocs Market power and world welfare effects," Journal of International Economics, Elsevier, vol. 40(3-4), pages 411-437, May.
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  4. 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.
  5. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
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  7. Arvind Panagariya, 2003. "The Regionalism Debate: An Overview," International Trade 0309007, EconWPA.
  8. Pravin Krishna, . "Regionalism and Multilaterialism: A Political Economy Approach," Working Papers 96-5, Brown University, Department of Economics.
  9. Fernandez, Raquel & Portes, Jonathan, 1998. "Returns to Regionalism: An Analysis of Nontraditional Gains from Regional Trade Agreements," World Bank Economic Review, World Bank Group, vol. 12(2), pages 197-220, May.
  10. Gene M. Grossman & Elhanan Helpman, 1993. "The Politics of Free Trade Agreements," NBER Working Papers 4597, National Bureau of Economic Research, Inc.
  11. Bhagwati, Jagdish & Greenaway, David & Panagariya, Arvind, 1998. "Trading Preferentially: Theory and Policy," Economic Journal, Royal Economic Society, vol. 108(449), pages 1128-48, July.
  12. Bhagwati, Jagdish N & Srinivasan, T N, 1980. "Revenue Seeking: A Generalization of the Theory of Tariffs," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1069-87, December.
  13. Winters, L. Alan, 1996. "Regionalism versus multilateralism," Policy Research Working Paper Series 1687, The World Bank.
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  15. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-19, September.
  16. de Melo, Jaime & Montenegro, Claudio & Panagariya, Arvind, 1992. "Regional integration, old and new," Policy Research Working Paper Series 985, The World Bank.
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