Peri Silva

The customs union issue: Why do we observe so few of them?

The number of preferential trade agreements has greatly increased over the past two decades, yet most existing bilateral arrangements take the form of free trade areas, and less than ten percent can be considered to be fully °edged customs unions. This paper develops a political economy model of trade policy under imperfect competition to provide a positive explanation for the prevalence of free trade areas. In a three-country setting, a representative from each prospective member is elected to determine the tariffs to be applied on imported goods. Under a customs union, the necessity to coordinate tariffs leads voters to strategically delegate power to more protectionist representatives. Contrary to most of the existing literature, we show that strategic delegation may imply that free trade areas increase welfare compared to customs unions. Moreover, the model also indicates that free trade areas are more likely to be politically viable than customs unions.

Economic Integration without Policy Coordination: The Case of Mercosur

This paper analyses the evolution of the South American Common Market, Mercosur. It shows how the lack of coordination of macroeconomic policies, especially of the two major participants (Argentina and Brazil), had caused trade strains and conflicting interests in attracting foreign investments. Divergent macro-economic policies have had negative effects on bilateral trade due to the risk averseness (resulting from bilateral exchange rate volatilities) of exporters and importers, and due to the protectionist forces they have brought forth. The paper also shows how the lack of policy coordination caused increased confrontations with respect to Foreign Direct Investment in the region.

Market Access for Sale: Latin America's Lobbying for US Tariff Preferences

This paper assesses the foreign lobbying forces behind the tariff preferences that the United States grants to Latin American and Caribbean countries. The basic framework is the one developed that is extended to explain the relationship between foreign lobbying and tariff preferences. Results suggest that returns to Latin American and Caribbean exporters lobbying for tariff preferences in the United States are around 50 percent. The reason for these large returns is the relatively low estimated weight given to social welfare in the U.S. governments objective function when deciding whether or not to grant tariff preferences to Latin American and Caribbean exporters.

Cooperation in WTO’s Tariff Waters?

This paper examines the extent to which tariff cooperation is observed among World Trade Organization members. With the help of a simple political economy model, we show that tariffs are positively correlated with the importer’s market power when they are set noncooperatively but negatively correlated when set cooperatively. We use this prediction to empirically identify the extent of cooperation in the WTO and find that more than three-quarters of WTO members’ tariffs are set noncooperatively.

Rules of origin and gains from trade

Free trade areas (FTAs) involve unharmonized tariffs and rules of origin that have prevented proving the formal general equilibrium existence of a welfare-enhancing FTA. This paper identifies the most restrictive limit that rules of origin can enforce and still continue to guarantee gains from trade for FTA formation. We note that many commonly used rules of origin exceed this condition in practice. We apply the identified welfare-supporting rules of origin and prove the existence of a FTA general equilibrium involving only within-FTA transfers that is at least as satisfactory for every consumer as an arbitrary original world trade allocation. The analysis also helps to explain why hub-and-spoke extensions of FTAs cannot be expected to guarantee gains from trade for all participants in general.

Value Added Exports and U.S. Local Labor Markets: Does China Really Matter?

In this paper, our main focus is the direct contribution of the Chinese economy to changes in U.S. labor market outcomes. Our results indicate that the effects of continuously rising value-added exports from China to the U.S. depend on the position of the Chinese exporting industry in the global value chain. In particular, we find that an increase in U.S. exposure to value-added exports from China in industries with high degree of downstreamness leads to negative effects on the share of manufacturing employment, while the same is not present in the case of industries with low degree of downstreamness. Moreover, our results also suggest that the effects of an increase in U.S. exposure to value-added exports from China on average wages and on unemployment levels depends on the position of the Chinese industry in the global value chain.

Mercosul: Its Successes and Failures During Its First Two Decades

ABSTRACT In this article, we consider the formation of the Common Market of the Southern Cone (Mercosur) as the outcome of an integration process where its two largest member countries (Brazil and Argentina) pursue industrialization objectives. The article considers the effects of Mercosur in terms of the promotion of economic efficiency and in terms of the promotion of new inflows of foreign direct investment. The article highlights that economic asymmetries between the two largest member countries have been a major obstacle in fostering economic integration in the Southern Cone region.

The Political Economy of Preferential Trade Arrangements: An Empirical Investigation

In this paper, we develop a political economy model to study the decision of representative democracies to join a preferential trading arrangement (PTA), distinguishing between free trade areas (FTA) and customs unions (CU). Our theoretical analysis suggests that income inequality and bilateral trade imbalances are important factors in determining the formation of PTAs, while it points out that differences in the production structure among prospective member countries is an important factor in determining whether a CU or an FTA will emerge in equilibrium. Our empirical analysis, covering a sample of 124 countries over the period 1950-2000, lends strong support for the predictions of the model.

Potential Pareto‐Improving Move Toward Most Favored Nation Tariffs

We use a multi-country asymmetric oligopolistic framework for segmented markets to study the welfare effects of reducing tariff discriminations - which we call a move towards Most Favored Nation tariffs. Both unilateral and multilateral reforms are considered. We investigate this issue under different scenarios such as when initial tariffs are arbitrary and when they are optimal. Conditions under which such harmonizations are potentially Paretoimproving are derived. We also analyze the effects on individual countries.

Industrial Targeting in Free Trade Areas with Policy Independence

We investigate the limits of a mechanism for free trade area (FTA) formation that simultaneously satisfies internal industrialization targets. For arbitrary targets, we find necessary and sufficient conditions that guarantee that the mechanism is efficient for member countries individually, even if other members do not implement the efficient policy. When the objective is conservative - designed to protect the level of industrialization previously achieved by the target industry - member countries are guaranteed gains from the efficient policy and their FTA participation. The analysis covers cases with transportation costs and explains why minimally restrictive rules of origin support efficiency and policy independence.