DP1448 Regional Integration and Lobbying for Tariffs Against Non-members

Author(s): Olivier Cadot , Jaime de Melo , Marcelo Olarreaga

Publication Date: August 1996

Keyword(s): Customs Union , Free Trade Area , Political Economy

JEL(s): F11 , F13 , F15

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP1448.asp

Using an extension of the influence-driven lobbying approach developed by Grossman and Helpman, we study the impact of regional integration arrangements (RIAs) on trade policy towards non-members in a three-good, three-country model. We explore under what conditions the formation of an RIA between countries A and B leads, through lobbying pressure, to a higher or lower tariff against country C. Comparing free trade areas (FTAs) with and without rules of origin and customs unions (CUs) with varying degrees of economic and political integration, we show how increasingly deep integration, both within an FTA and a CU, can lead to rising protection against non-member imports. These results, which abstract from two differences between FTAs and CUs, namely the extent of free-riding in CUs and the component of a CU’s tariffs designed to improve the members’ terms of trade, need to be qualified accordingly. As it stands, the results nevertheless suggest that FTAs are likely to welfare-dominate CUs.