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Rent Destruction and the Political Viability of Free Trade Agreements

Emanuel Ornelas

The Quarterly Journal of Economics, 2005, vol. 120, issue 4, 1475-1506

Abstract: This paper studies the political viabihty of free trade agreements (FTAs). The key element of the analysis is the "rent destruction" that these arrangements induce: by eliminating intrabloc trade barriers, an FT A lowers the incentives of import-competing industries to lobby for higher external tariffs, thereby inducing a reduction of the rents created in the lobbying process. Using a conventional competitive model, I show that the prospect of rent destruction can critically undermine (and in some cases rule out entirely) the political viability of welfare-reducing FTAs. This result contrasts sharply with findings from the earlier regionalism literature.

Date: 2005
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