Evidence from Mercosur suggests that eliminating duty drawbacks for intra-regional exports would lead to increased counterlobbying against protection of intermediate products. Without the duty drawback, the common external tariff would have been an estimated 3.5 percentage points (25 percent) higher on average.

January 2001 Evidence from Mercosur suggests that eliminating duty drawbacks for intra-regional exports would lead to increased counterlobbying against protection of intermediate products. Without the duty drawback, the common external tariff would have been an estimated 3.5 percentage points (25 percent) higher on average. Duty drawback (or rebate) systems reduce or eliminate the duties paid on imported intermediate goods or raw materials used in the production of exports. When a firm imports an intermediate product for use in the production of an export good, tariff payments on the imported intermediate good are either waived (duty drawback) or returned to the producer once the final product is exported (rebate). These incentive systems are often justified on the grounds that they tend to correct the anti-trade bias imposed by high tariff levels. The problem with this line of reasoning is that it assumes that tariffs are predetermined policy variables; if they were, the easiest way to reduce their anti-trade bias would be to eliminate them. But this is rarely done because existing levels of protection correspond to a political economy equilibrium difficult to modify in the presence of lobbying pressures. Cadot, de Melo, and Olarreaga show that in a political economy setting where tariffs and duty drawbacks are endogenously chosen through industry lobbying, full duty drawbacks are granted to exporters that use imported intermediate goods in their production. This in turn decreases their incentives to counterlobby against high tariffs on their inputs. Indeed, under a full duty drawback regime, tariffs on intermediate goods are irrelevant to exporters because they are fully rebated. In equilibrium, higher tariffs will be observed on these goods. Creating a regional trading bloc alters the incentives by eliminating duty drawbacks on intraregional exports, which leads to lower tariffs for goods that intraregional exporters use as inputs. Evidence from Mercosur suggests that eliminating duty drawbacks for intra-regional exports would lead to increased counterlobbying against protection of intermediate products. Cadot, de Melo, and Olarreaga estimate that without this mechanism, the common external tariff would have been 3.5 percentage points (25 percent) higher on average. This paper--a product of Trade, Development Research Group--is part of a larger effort in the group to study the political economy of trade policy. The research was funded by the Bank's Research Support Budget under the research project "The Anti-export Bias of Duty Drawbacks." The authors may be contacted at [email protected], [email protected], or [email protected].

Evidence from Mercosur su ...

Differences in the choices of trade and macro policies, both by developing countries and by developed countries towards developing countries, have been critical in determining the overall performance of developing countries. All too often, the performance of developing countries has not been assessed using appropriately conducted studies. The papers in this book are chosen to bridge this gap and show how a quantitative approach to policy evaluation can help resolve controversies and explain the choice of observed policies.The book brings together carefully selected papers that assess the impacts of various trade and macro policies, by quantifying the policies of developing countries at the macro level (exchange rate, investment, savings) and at the sector level (trade and industrial policies), in addition to policies of developed countries towards developing countries (trade preferences, quotas, VERs and migration policies). Facets of the political economy of trade, migration, and climate policies are explored (such as the enlargement of the EU, the rise of regionalism and how it can ease the pains of adjustment to trade liberalization, openness and inequality). Growing tensions between trade and the environment are also investigated. In short, this book covers a wide area of events ranging from external and internal shocks to external and internal policies, showing how the consequences of these events can be brought to rigorous quantitative analysis.

"Many countries use duty drawbacks on exports, yet they have been given little attention in the literature and there is no consensus whether countries should embrace or abandon them. Ianchovichina asserts that the answer depends on a country's development priorities and economic conditions. An increase in the drawback has a positive impact on export competitiveness and employment, but could lead to exports with low domestic value added. The welfare effects of duty drawback reform are ambiguous. An increase in the drawback is more likely to be welfare improving if the economy is small with high input tariffs, low initial drawback, low administrative costs, and leakages in the tariff collection system. In China duty drawback removal after meeting WTO commitments will deepen domestic supply chains and improve welfare, but will hurt China's economic efficiency, export competitiveness, and real factor incomes. Further liberalization could mitigate these negative effects. This paper--a product of the Economic Policy Division, Poverty Reduction and Economic Management Network--is part of a larger effort in the network to study growth and competitiveness"--World Bank web site.

Critics of free trade have raised the specter of a "race to the bottom" in which environmental standards collapse because polluters threaten to relocate to "pollution havens" in the developing world. The flaw in the race-to-the-bottom model is that its basic assumptions misrepresent the political economy of pollution control in developing countries

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