The protectionist bias of duty drawbacks: evidence from Mercosur |
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Authors: | Olivier Cadot Marcelo Olarreaga |
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Institution: | a HEC Lausanne, BFSH1, CH 1015 Dorigny, Switzerland, CERDI and CEPR b University of Geneva, 40 Bvd du Pont d’Arve, 1211 Geneva, Switzerland, CERDI and CEPR c The World Bank, 1818 H St NW, Washington, DC 20433, USA, and CEPR |
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Abstract: | In a political-economy setting where tariffs and duty drawbacks are endogenously chosen through industry lobbying, it is shown that full duty-drawbacks are granted to exporters who use imported intermediates in their production. This in turn decreases their incentives to counter-lobby against high tariffs on their inputs. In equilibrium, higher tariffs will be observed on these goods. The creation of a regional block will change the political equilibrium. Duty-drawbacks will be eliminated on intra-regional exports, which in turn will lead to lower tariffs for goods used as inputs by intra-regional exporters. Evidence from Mercosur suggests that the elimination of duty-drawbacks for intra-regional exports led to increased counter-lobbying by users of intermediate products. In its absence the common external tariff would have been on average 3.5 percentage points (25 percent) higher. |
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Keywords: | Duty-drawbacks Political-economy Mercosur New regionalism |
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