Endogenous Trade Protection under Regional Trade Agreements

Endogenous tariff formation has been the subject of theoretical studies that attempt to determine the fundamental economic variables that influence the structure of industry protection implemented by international trade policy makers. An empirical analysis of endogenous tariff formation under the framework of a regional trade agreement implemented by the Andean Community Group is offered in this book. Econometric models for the groups common external tariff (CET) and for individual country tariff deviations with respect to the CET are estimated. The causal links among the variables are obtained by using the directed acyclical graphs (DAG) approach, which allows for a refined search for causal relationships. The approach is particularly appealing for the analysis of endogenous trade protection since it allows analyzing economic systems that involve policy intervention. The empirical analysis supports classic theoretical models on trade protection, such as the equity concern model, the interest group and the adding machine model. However, a rather interesting result derived from the DAG analysis is the feedback interaction that seems to operate between tariffs and policy variables.