Working Paper: CEPR ID: DP2559
Authors: Olivier Cadot; Jaime de Melo; Marcelo Olarreaga
Abstract: In a political-economy setting where tariffs and duty drawbacks are endogenously chosen through industry lobbying, it is shown that full duty-drawbacks are granted to exporters who use imported intermediates in their production. This in turn decreases their incentives to counter-lobby against high tariff on their inputs. In equilibrium, higher tariffs will be observed on these goods. The creation of a regional block will change the political equilibrium. Duty-drawbacks will be eliminated on intra-regional exports, which in turn will lead to lower tariffs for goods used as inputs by intra-regional exporters. Evidence from Mercosur suggests that the elimination of duty-drawbacks for intra-regional exports, led to increased counter-lobbying by users of intermediate products. In its absence the common external tariff would have been on average 3.5 percentage points (25 percent) higher.
Keywords: duty drawbacks; Mercosur; new regionalism; 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 |
|---|---|
| full duty drawbacks (F18) | decreased counterlobbying against tariffs on imported intermediates (L49) |
| elimination of duty drawbacks for intraregional exports (F14) | increased counterlobbying by users of intermediate products (L49) |
| increased counterlobbying by users of intermediate products (L49) | lower tariffs on those goods (F13) |
| absence of duty drawbacks (G33) | common external tariff (CET) would have been approximately 35 percentage points higher (F15) |