Working Paper: CEPR ID: DP2310
Authors: Marcelo Olarreaga; Isidro Soloaga; L. Alan Winters
Abstract: The theoretical literature follows two different approaches to explain the endogenous formation of a Customs Union (CU). The first one explains CU formation through the willingness of integrating partners to exploit terms-of-trade effects. Indeed, as the union forms, the 'domestic market' gets larger and members' international market power increases. The alternative explanation is related to political-economy aspects such as the CU offering the possibility of exchanging markets or protection within the enlarged market. Which is the engine behind CU formation? This is the question at the core of this paper. Results suggest that in the case of the Common Market of the Southern Cone (Mercosur) both forces were important. Terms-of-trade effects account for between 6 and 28 percent of the explained variation in the structure of protection. There is also evidence that the terms-of-trade externalities among Mercosur's members have been internalized in the Common External Tariff (CET).
Keywords: endogenous tariffs; political economy; terms-of-trade effects; Mercosur
JEL Codes: F13; F14; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Terms-of-trade effects (F16) | Common External Tariff (CET) (F15) |
| Political-economy factors (P19) | Common External Tariff (CET) (F15) |
| Brazil raises its tariffs (F69) | International prices decrease (F69) |
| International prices decrease (F69) | Benefit to Argentina if it imports similar goods (F14) |
| Internalization of externalities among Mercosur members (F64) | Common External Tariff (CET) (F15) |