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Exempted Sectors in Free Trade Agreements

Author

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  • Alan V. Deardorff

    (University of Michigan)

  • Rishi R. Sharma

    (Colgate University)

Abstract

Almost all participants in free trade agreements (FTAs) exclude at least a few products or sectors from complete tariff removal on the exports of their FTA partners. The positive tariffs that remain within an FTA are often the highest tariffs that the countries apply on an MFN basis. It seems plausible that such exclusions may be chosen because the domestic producers of these products are viewed as especially vulnerable to competition from imports from the partner country. In brief, they are especially Òsensitive sectors.Ó We develop this idea theoretically and then test it empirically on data from 37 countries in 240 importer-exporter pairs within FTAs. We find support for the sensitive-sector hypothesis only in the high-income countries. We find low-income countries, in contrast, to exempt sectors where bilateral tariff removal would be more likely trade diverting and therefore harmful. Our explanation for this, supported empirically, is not that they are following the advice of trade economists, but rather that they are avoiding loss of tariff revenue and also being influenced by the greater bargaining power of richer and/or larger partners in their FTAs.

Suggested Citation

  • Alan V. Deardorff & Rishi R. Sharma, 2018. "Exempted Sectors in Free Trade Agreements," Working Papers 665, Research Seminar in International Economics, University of Michigan.
    • Handle: RePEc:mie:wpaper:665
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    References listed on IDEAS

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    1. Alan V. Deardorff & Rishi R. Sharma, "undated". "The Simple Analytics of Trade Creation and Diversion," Working Papers 670, Research Seminar in International Economics, University of Michigan.
    2. Besedes, Tibor & Kohl, Tristan & Lake, James, 2020. "Phase out tariffs, phase in trade?," Journal of International Economics, Elsevier, vol. 127(C).
    3. Grossman, Gene M & Helpman, Elhanan, 1995. "The Politics of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 85(4), pages 667-690, September.
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    5. Soderbery, Anson, 2018. "Trade elasticities, heterogeneity, and optimal tariffs," Journal of International Economics, Elsevier, vol. 114(C), pages 44-62.
    6. Deardorff, Alan V., 2018. "Sensitive Sectors in Free Trade Agreements," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 22(4), pages 403-425, December.
    7. Egger, Peter & Larch, Mario, 2008. "Interdependent preferential trade agreement memberships: An empirical analysis," Journal of International Economics, Elsevier, vol. 76(2), pages 384-399, December.
    8. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
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    10. Houssein Guimbard & Sébastien Jean & Mondher Mimouni & Xavier Pichot, 2012. "MAcMap-HS6 2007, an Exhaustive and Consistent Measure of Applied Protection in 2007," International Economics, CEPII research center, issue 130, pages 99-122.
    11. repec:cii:cepiei:2012-q2-130-5 is not listed on IDEAS
    12. Rishi R. Sharma, 2018. "Optimal tariffs with inframarginal exporters," Review of International Economics, Wiley Blackwell, vol. 26(4), pages 768-783, September.
    13. Hofmann,Claudia & Osnago,Alberto & Ruta,Michele, 2017. "Horizontal depth : a new database on the content of preferential trade agreements," Policy Research Working Paper Series 7981, The World Bank.
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    Cited by:

    1. Ornelas, Emanuel & Tovar, Patricia, 2022. "Intra-bloc tariffs and preferential margins in trade agreements," Journal of International Economics, Elsevier, vol. 138(C).
    2. Ornelas, Emanuel & Turner, John L. & Bickwit, Grant, 2021. "Preferential trade agreements and global sourcing," Journal of International Economics, Elsevier, vol. 128(C).
    3. Nobuhiro Hosoe & Yuko Akune, 2019. "Can the Japanese Agri-food Sectors Survive by Promoting their Exports?:A General Equilibrium Analysis with Farm Heterogeneity and Product Differentiation," GRIPS Discussion Papers 19-06, National Graduate Institute for Policy Studies.
    4. Kuenzel, David J. & Sharma, Rishi R., 2021. "Preferential trade agreements and MFN tariffs: Global evidence," European Economic Review, Elsevier, vol. 138(C).
    5. Alan V. Deardorff & Rishi R. Sharma, "undated". "The Simple Analytics of Trade Creation and Diversion," Working Papers 670, Research Seminar in International Economics, University of Michigan.
    6. Hosoe, Nobuhiro & Akune, Yuko, 2019. "Impact of Trade Liberalization on the Japanese Agri-food Sectors: A General Equilibrium Analysis with Farm Heterogeneity and Product Differentiation," Conference papers 333025, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

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    More about this item

    Keywords

    sensitive sectors; exempted sectors; free trade agreements;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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