Working Paper: CEPR ID: DP1448
Authors: Olivier Cadot; Jaime de Melo; Marcelo Olarreaga
Abstract: Using an extension of the influence-driven lobbying approach developed by Grossman and Helpman, we study the impact of regional integration arrangements (RIAs) on trade policy towards non-members in a three-good, three-country model. We explore under what conditions the formation of an RIA between countries A and B leads, through lobbying pressure, to a higher or lower tariff against country C. Comparing free trade areas (FTAs) with and without rules of origin and customs unions (CUs) with varying degrees of economic and political integration, we show how increasingly deep integration, both within an FTA and a CU, can lead to rising protection against non-member imports. These results, which abstract from two differences between FTAs and CUs, namely the extent of free-riding in CUs and the component of a CU?s tariffs designed to improve the members? terms of trade, need to be qualified accordingly. As it stands, the results nevertheless suggest that FTAs are likely to welfare-dominate CUs.
Keywords: Free Trade Area; Customs Union; Political Economy
JEL Codes: F11; F13; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| formation of an FTA with binding rules of origin (F15) | asymmetric tariff equilibria (F12) |
| elimination of rules of origin (F15) | reimposition of import barriers (F14) |
| moving to a customs union from an FTA (F15) | common external tariff (F15) |
| deeper integration (F15) | increased lobbying pressures (D72) |
| increased lobbying pressures (D72) | higher tariffs against nonmembers (F13) |
| deeper integration (F15) | higher tariffs against nonmembers (F13) |
| type of regional integration (F15) | level of protectionism against nonmembers (F13) |