The Protectionist Bias of Duty Drawbacks: Evidence from Mercosur

Olivier Cadot, Jaime de Melo and Marcelo Olarreaga

Chapter 15 in Developing Countries in the World Economy, 2015, pp 359-380 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In a political-economy setting where tariffs and duty drawbacks are endogenously chosen through industry lobbying, it is shown that full duty-drawbacks are granted to exporters who use imported intermediates in their production. This in turn decreases their incentives to counter-lobby against high tariffs on their inputs. In equilibrium, higher tariffs will be observed on these goods. The creation of a regional block will change the political equilibrium. Duty-drawbacks will be eliminated on intra-regional exports, which in tum will lead to lower tariffs for goods used as inputs by intra-regional exporters. Evidence from Mercosur suggests that the elimination of duty-drawbacks for intra-regional exports led to increased counter-lobbying by users of intermediate products. In its absence the common external tariff would have been on average 3.5 percentage points (25 percent) higher.

Keywords: Trade Barriers and Market Structure; Quantitative Restrictions; Political Economy and Migration; Trade and the Environment (search for similar items in EconPapers)
Date: 2015
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Journal Article: The protectionist bias of duty drawbacks: evidence from Mercosur (2003)
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