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Exempted Sectors in Free Trade Agreements

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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 "sensitive sectors." 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

  • Deardorff, Alan & Sharma, Rishi, 2018. "Exempted Sectors in Free Trade Agreements," Working Papers 2018-02, Department of Economics, Colgate University.
    • Handle: RePEc:cgt:wpaper:2018-02
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    6. 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.
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    Cited by:

    1. Ornelas, Emanuel & Turner, John L. & Bickwit, Grant, 2021. "Preferential trade agreements and global sourcing," Journal of International Economics, Elsevier, vol. 128(C).
    2. Kuenzel, David J. & Sharma, Rishi R., 2021. "Preferential trade agreements and MFN tariffs: Global evidence," European Economic Review, Elsevier, vol. 138(C).
    3. 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.
    4. Ornelas, Emanuel & Tovar, Patricia, 2022. "Intra-bloc tariffs and preferential margins in trade agreements," Journal of International Economics, Elsevier, vol. 138(C).
    5. 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.
    6. 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.

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    More about this item

    Keywords

    sensitive sectors; exempted sectors; FTAs;
    All these keywords.

    JEL classification:

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

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