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

Baybars Karacaovali
2013 Social Science Research Network  
There has been a proliferation of preferential trade agreements within the last two decades. This paper analyzes the e¤ects of free trade agreements (FTAs) on external tari¤s in small economies where protection decisions are made politically. It extends the Grossman and Helpman (1995) model by determining tari¤ rates endogenously instead of assuming they are ...xed during or after the formation of FTAs. We show that when an FTA is established, the tari¤ rates that apply to non-members
more » ... y decline. More importantly, we investigate the interaction between endogenous tari¤ determination and the feasibility of an FTA. We ...nd that the expectation of tari¤ reductions under endogenous tari¤s could make an otherwise feasible FTA if tari¤s were ...xed become infeasible. However, if domestic import-competing sectors are relatively smaller and the government places a signi...cant weight on political contributions relative to social welfare, an FTA with endogenous tari¤s may be more likely to be feasible than an FTA assumed to ...x external tari¤s. JEL Classi...cation: F13, F15.
doi:10.2139/ssrn.2372226 fatcat:ontp262b6jcsxbjfzncaaohj6u