Free Trade Agreements and External Tariffs

Baybars Karacaovali

Fordham Economics Discussion Paper Series from 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.

Keywords: Free trade agreements; political economy of trade policy; trade liberalization; feasibility (search for similar items in EconPapers)
JEL-codes: F13 F15 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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