Working Paper: CEPR ID: DP1878
Authors: Olivier Cadot; Jaime de Melo; Marcelo Olarreaga
Abstract: Using the influence-driven approach to endogenous trade-policy determination, we show how a free-trade agreement (FTA) with rules of origin can work as a device to compensate losers from trade liberalization. The FTA constructed in this paper is characterized by external tariff structures that are negatively correlated across member countries, ensuring efficiency gains and, through reduced average protection, compatibility with the multilateral trading system?s requirements. It is also politically viable and we demonstrate that, in the countries concerned, governments are willing to include its formation in the political agenda even though, in equilibrium, political contributions from producer lobbies decline after the agreement.
Keywords: Free Trade Areas; 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 |
|---|---|
| FTA (F38) | reduction in average protection (D18) |
| FTA (F38) | decline in political contributions from producer lobbies (D72) |
| decline in political contributions from producer lobbies (D72) | efficiency gains (D61) |
| FTA with rules of origin (F15) | selective reduction of external tariffs (F15) |
| selective reduction of external tariffs (F15) | maintenance of domestic producer prices (L11) |
| selective reduction of external tariffs (F15) | political support for trade agreement (F13) |
| political support for trade agreement (F13) | welfare-enhancing reductions in protection (D60) |
| welfare-enhancing reductions in protection (D60) | decrease in consumer prices (E31) |
| FTA (F38) | political viability of FTAs (F15) |
| political viability of FTAs (F15) | maintenance of political support from industries (D72) |