Publication: Can Duty Drawbacks Have a Protectionist Bias? Evidence from MERCOSUR
Date
2001-01
ISSN
Published
2001-01
Author(s)
Cadot, Olivier
de Melo, Jaime
Olarreaga, Marcelo
Abstract
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 anti0trade 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. The authors 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
counter-lobby 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 block, alters the
incentives by eliminating duty drawbacks on intra-regional
exports, which leads to lower tariffs for goods that
intra-regional exporters use as inputs. Evidence from
MERCOSUR suggests that eliminating duty drawbacks for
intra-regional exports, would lead to increased
counter-lobbying against protection of intermediate
products. The authors estimate that without this mechanism,
the common external tariff would have been 3.5 percentage
points (25 percent) higher on average.
Link to Data Set
Citation
“Cadot, Olivier; de Melo, Jaime; Olarreaga, Marcelo. 2001. Can Duty Drawbacks Have a Protectionist Bias? Evidence from MERCOSUR. Policy Research Working Paper;No. 2523. © World Bank, Washington, DC. http://hdl.handle.net/10986/19729 License: CC BY 3.0 IGO.”
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