Working Paper: CEPR ID: DP2176
Authors: Jean-Marie Grether; Jaime de Melo; Marcelo Olarreaga
Abstract: This paper uses a political economy approach to analyze the pattern of Mexican manufacturing sector protection during the period of trade policy reforms between 1985 and 1989 when Mexico experiences both an important inflow of foreign direct investment (FDI), and a significant trade liberalization. The approach takes into account the potential role of FDI on endogenous tariff formation. It turns out that the data are coherent with the proposed approach in which trade policy formulation reflects political support and in which the sectoral presence of FDI has a strong influence on the determination of the pattern of tariff protection before and during the reform. In particular in Mexican manufacturing, FDI-intensive sectors received higher protection in import-competing sectors, though the move towards greater openness was associated with a reduction in the influence of industrial and FDI lobbying.
Keywords: Mexico; Endogenous Protection; Foreign Direct Investment
JEL Codes: F13; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign Direct Investment (FDI) (F21) | tariff protection levels (F13) |
| Foreign Direct Investment (FDI) (F21) | tariff protection levels in import-competing sectors (F14) |
| increased openness (O36) | protective influence of FDI (F23) |
| Foreign Direct Investment (FDI) (F21) | lower tariffs in certain sectors (F13) |
| tariff protection levels in FDI-intensive sectors (F23) | effective lobbying (D72) |