We find that the Canadian-US free trade agreement was a “building block“ for multilateral tariff cuts during the Uruguay Round, with preferential exchange of market access reducing rents and resistance to tariff cuts.
If a free trade agreement (FTA) is characterized by the exchange of market access with a large and competitive trading partner, the agreement can cause a leakage of protectionist benefits to domestic industry from lobbying against external tariff cuts. This rent destruction effect of an FTA can free policy makers to be more aggressive in multi-lateral tariff cuts. We argue that the Canadian-US free trade agreement (CUSFTA) provides an ideal policy experiment to link this mechanism to the data. Exploring the determinants of Canada’s tariff cuts at the 8 digit HS product level, we find that CUSFTA acted as an additional driver of Canadian multilateral tariff reductions during the Uruguay Round.
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Tobias Ketterer, Daniel Bernhofen and Chris Milner
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