Munich Personal RePEc Archive

Tariff Cooperation in Free Trade Areas

Mai, Joseph and Stoyanov, Andrey (2018): Tariff Cooperation in Free Trade Areas.

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Abstract

This paper develops a model of endogenous trade policy formation to study the impact of free trade agreements (FTA) on external trade policies of member states when they internalize the intra-bloc welfare effects. This model is empirically tested using global trade data covering 170 countries and 177 FTAs established between 1988 and 2011. We find empirical evidence of tariff cooperation between members of FTAs. Using three different measures of political relations (the affinity scores from the UN General Assembly Voting Data, dyad alliances data, and bilateral events and interactions data), we show that members with good political relations cooperate more on external tariff policy after formation of FTAs. On average, an increase in the market share of FTA partners' firms by one standard deviation is associated with about 3 percentage points increase in external tariffs.

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