No: ERAD-98-02  

Authors:

• Olivier Cadot
  INSEAD and CEPR  
• Jaime de Melo
  University of Geneva and CEPR  
• Marcelo Olarreaga
  World Trade Organization and CEPR  

Manuscript date: June 1998  

Abstract Back to top

Using the influence-driven approach to endogenous trade-policy determination, we show how a free-trade agreement (FTA) with rules of origin can work as a device to compensate losers from trade liberalization. The FTA constructed in this paper is characterized by external tariff structures that are negatively correlated across member countries, ensuring efficiency gains and, through reduced average protection, compatibility with the multilateral trading system's requirements. It is also politically viable, and we demonstrate that, in the countries concerned, governments are willing to include its formation in the political agenda in spite of the fact that, in equilibrium, political contributions from producer lobbies decline after the agreement. 

Keywords  Back to top

Free-trade areas, political economy. 

JEL codes: [F13], [F13], [F15] 

Download paper in pdf format (261 KB, 23 pages)