Trade-Diverting Free Trade Agreements, External Tariffs, and Feasibility

University of Hawaii at Manoa, Department of Economics Working Paper No. 13-21

33 Pages Posted: 28 Dec 2013

Date Written: December 1, 2013

Abstract

There has been a proliferation of preferential trade agreements within the last two decades. This paper analyzes the effects of free trade agreements (FTAs) on external tariffs in small economies where protection decisions are made politically. It extends the Grossman and Helpman (1995) model by determining tariff rates endogenously instead of assuming they are fixed during or after the formation of FTAs. We show that when an FTA is established, the tariff rates that apply to non-members essentially decline. More importantly, we investigate the interaction between endogenous tariff determination and the feasibility of an FTA. We find that the expectation of tariff reductions under endogenous tariffs could make an otherwise feasible FTA if tariffs were fixed become infeasible. However, if domestic import-competing sectors are relatively smaller and the government places a significant weight on political contributions relative to social welfare, an FTA with endogenous tariffs may be more likely to be feasible than an FTA assumed to fix external tariffs.

Keywords: Free trade agreements, political economy of trade policy, trade liberalization, feasibility

JEL Classification: F13, F15

Suggested Citation

Karacaovali, Baybars, Trade-Diverting Free Trade Agreements, External Tariffs, and Feasibility (December 1, 2013). University of Hawaii at Manoa, Department of Economics Working Paper No. 13-21, Available at SSRN: https://ssrn.com/abstract=2372226 or http://dx.doi.org/10.2139/ssrn.2372226

Baybars Karacaovali (Contact Author)

Hawaii Department of Taxation

830 Punchbowl St
Honolulu, HI 96813
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
79
Abstract Views
506
Rank
555,299
PlumX Metrics