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Title: The Protectionist Bias of Duty Drawbacks and the New Regionalism

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

Publication Date: September 2000

Keyword(s): Duty-Drawbacks, Mercosur, New Regionalism and Political-Economy

Programme Area(s): International Trade and Regional Economics

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 tariff 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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Bibliographic Reference

Cadot, O, de Melo, J and Olarreaga, M. 2000. 'The Protectionist Bias of Duty Drawbacks and the New Regionalism'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2559