Rent Dissipation, Political Viability, and the Strategic Adoption of Free Trade Agreements

34 Pages Posted: 7 Jan 2003

Date Written: December 8, 2003

Abstract

This paper studies the political viability of free trade agreements (FTAs). The key element of the analysis is the "rent dissipation" that these arrangements induce: by eliminating intra-bloc trade barriers, an FTA lowers the incentives of the local firms to lobby for higher external tariffs, thereby inducing a reduction of the rents created in the lobbying process. The prospect of rent dissipation induces governments to support only FTAs that are "substantially" welfare improving, and no FTA that reduces national welfare. Accounting for the possibility of political turnover, rent dissipation also creates "strategic" motivations for the formation of FTAs. Specifically, a government facing a high enough probability of losing power may form a trading bloc simply to "tie the hands" of its successor. An FTA can affect the likelihood of political turnover as well. If the incumbent party has a known bias toward special interests, commitment to less distortionary policies would reduce its electoral disadvantage; the rent dissipation effect ensures that an FTA can serve as the vehicle for such a commitment.

Keywords: Regionalism, Preferential liberalization, Lobbying, Political Uncertainty

JEL Classification: D72, F13, F15

Suggested Citation

Ornelas, Emanuel, Rent Dissipation, Political Viability, and the Strategic Adoption of Free Trade Agreements (December 8, 2003). Available at SSRN: https://ssrn.com/abstract=350520 or http://dx.doi.org/10.2139/ssrn.350520

Emanuel Ornelas (Contact Author)

Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://https://sites.google.com/site/emanuelornelaseo/