Business Intelligence

Free Trade Agreements And External Tariffs

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Executive Summary

There has been a proliferation of preferential trade agreements within the last two decades. This paper analyzes the effects of Free Trade Agreements (FTAs) on external tariffs under a political economy setup. The author extends the Grossman and Helpman (1995) model by determining tariff rates endogenously instead of assuming they are fixed during or after the formation of FTAs. It shows that for an exogenously established FTA, the tariff rates that apply to non-members essentially decline once the FTA is formed.

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