Can Bilateralism Ease the Pains of Multilateral Trade Liberalization?
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.
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]
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