What's Behind Mercosur's Common External Tariff?

42 Pages Posted: 8 May 2000

See all articles by Marcelo Olarreaga

Marcelo Olarreaga

University of Geneva; Centre for Economic Policy Research (CEPR)

Isidro Soloaga

Universidad Iberoamericana Ciudad de México

L. Alan Winters

University of Sussex; IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Date Written: 1999

Abstract

Most researchers focus on the political economy (interest group pressures) approach to analyzing why customs unions are formed, but terms-of-trade effects were also important in formation of the Common Market of the Southern Cone (Mercosur). Terms-of-trade externalities among Mercosur's members have been internalized in the common external tariff.

The theoretical literature on trade follows two different approaches to explaining the endogenous formation of customs unions: (1) The terms-of-trade approach, in which integrating partners are willing to exploit terms-of-trade effects. Using the terms-of-trade approach, one concludes that tariffs on imports from the rest of the world should increase after the formation of a regional bloc, because the market power of the region increases and terms-of-trade externalities can be internalized in the custom union's common external tariff. As the union forms, the domestic market gets larger and members' international market power increases. (2) The interest group pressures (political economy) approach, in which, for example, the customs union may offer the potential for exchanging markets or protection within the enlarged market. Using this approach, one would usually conclude that tariffs for the rest of the world decline after the custom union`s formation - a rationale related to free-rider effects in larger lobbying groups.

It is important to recognize the forces behind the formation of customs unions. Most researchers have focused on the second approach and neglected terms of trade as a possible explanatory variable. Both rationales explain a significant share of tariff information.

Results, write Olarreaga, Soloaga, and Winters, suggest that both forces were important in formation of the Common Market of the Southern Cone (Mercosur).

Terms-of-trade effects account for between 6 percent and 28 percent of the explained variation in the structure of protection. There is also evidence that the terms-of-trade externalities among Mercosur's members have been internalized in the common external tariff.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to understand the political economy of trade protection. Marcelo Olarreaga may be contacted at molarreaga@worldbank.org.

JEL Classification: F13, F14, F15

Suggested Citation

Olarreaga, Marcelo and Soloaga, Isidro and Winters, L. Alan Alan, What's Behind Mercosur's Common External Tariff? (1999). Available at SSRN: https://ssrn.com/abstract=217088

Marcelo Olarreaga (Contact Author)

University of Geneva ( email )

40 Boulevard du Pont-d'Arve
Genève, CH - 1205
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Isidro Soloaga

Universidad Iberoamericana Ciudad de México ( email )

United States

HOME PAGE: http://www.iberoeconomia.mx\IsidroSoloaga

L. Alan Alan Winters

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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