Rent Destruction and the Political Viability of Free Trade Agreements

Abstract

This paper studies the political viability of free trade agreements (FTAs). The key element of the analysis is the "rent destruction" that these arrangements induce: by eliminating intrabloc trade barriers, an FTA lowers the incentives of import-competing industries to lobby for higher external tariffs, thereby inducing a reduction of the rents created in the lobbying process. Using a conventional competitive model, I show that the prospect of rent destruction can critically undermine (and in some cases rule out entirely) the political viability of welfare-reducing FTAs. This result contrasts sharply with findings from the earlier regionalism literature. Copyright (c) 2005 Massachusetts Institute of Technology.

External trade diversion, exclusion incentives and the nature of preferential trade agreements

“…Thus, though the restriction on external tari¤s of CU members fails to further the cause of global free trade, it makes the resulting CU more attractive from a global welfare perspective by softening the adverse impact of the CU on the non-member country. 20 Hereafter, we assume that a CU must abide by the external tari¤ restriction imposed by GATT Article XXIV. A useful implication of abiding by GATT Article XXIV in our model is that the welfare of members of a CU becomes equal to that of FTA members (since their external tari¤s become equal and internal tari¤s are zero in both cases).…”

The customs union issue: Why do we observe so few of them?

“…Key to these results is the assumption that tariffs on non-member countries are frozen at the pre-formation levels. On the contrary, Ornelas (2005a) shows that if post-formation external tariffs are endogenously determined, then the political viability of welfare reducing free trade areas is critically undermined even in the presence of pressure groups. In this case, he shows that the government may end up not endorsing welfare enhancing free trade areas but, at the same time, cannot endorse welfare reducing ones when pressure groups do not influence the government's decision to create a free trade area.…”

Rent seeking and regional integration agreements

“…Moreover, the current tests did not take into account the possibility that the effect of corruption is non-linear (cf. [18] and [19]). for clusters on the level of each country A and country B.…”

“…Ornelas [18] expands the model of Grossman and Helpman by adding a rent-destruction effect. He argues that RIAs lead to more competition between countries, which reduces the returns to high external tariffs for the import competing industries.…”