Trade-Diverting Free Trade Agreements, External Tariffs, and Feasibility

Baybars Karacaovali

No 201321, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: There has been a proliferation of preferential trade agreements within the last two decades. This paper analyzes the effects of free trade agreements (FTAs) on external tariffs in small economies where protection decisions are made politically. It extends the Grossman and Helpman (1995) model by determining tariff rates endogenously instead of assuming they are fixed during or after the formation of FTAs. We show that when an FTA is established, the tariff rates that apply to non-members essentially decline. More importantly, we investigate the interaction between endogenous tariff determination and the feasibility of an FTA. We find that the expectation of tariff reductions under endogenous tariffs could make an otherwise feasible FTA if tariffs were fixed become infeasible. However, if domestic import-competing sectors are relatively smaller and the government places a significant weight on political contributions relative to social welfare, an FTA with endogenous tariffs may be more likely to be feasible than an FTA assumed to fix external 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)
Pages: 32 pages
Date: 2013-12
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.economics.hawaii.edu/research/workingpapers/WP_13-21.pdf First version, 2013 (application/pdf)

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Journal Article: Trade-diverting free trade agreements, external tariffs, and feasibility (2016)
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