The protectionist bias of duty drawbacks: evidence from Mercosur

In a political-economy setting where tariffs and duty drawbacks are endogenously chosen through industry lobbying, it is shown that full duty-drawbacks are granted to exporters who use imported intermediates in their production. This in turn decreases their incentives to counter-lobby against high tariffs on their inputs. In equilibrium, higher tariffs will be observed on these goods. The creation of a regional block will change the political equilibrium. Duty-drawbacks will be eliminated on intra-regional exports, which in turn will lead to lower tariffs for goods used as inputs by intra-regional exporters. Evidence from Mercosur suggests that the elimination of duty-drawbacks for intra-regional exports led to increased counter-lobbying by users of intermediate products. In its absence the common external tariff would have been on average 3.5 percentage points (25 percent) higher. (C) 2002 Elsevier Science B.V. All rights reserved.