Trade Diversion & CAFTA’s Passage: Cause & Effect?

Although CAFTA’s passage certainly depended upon last-minute horse-trading in Congress, it received plenty of support because the agreement will benefit US exporters. And as the US Trade Representative’s office proudly trumpeted, many of those benefits will be due to trade diversion: “Eliminating these tariffs will create in many cases preferences for U.S. exporters over third country suppliers, including those in Canada, Europe, and South America, helping to restore lost U.S. market share and expand overall U.S. exports.”

Celebrate CAFTA’s passage by reading Pravin Krishna’s classic paper on this topic:

Preferential trading arrangements are analyzed from the viewpoint of the “new political economy” that views trade policy as being determined by lobbying of concentrated interest groups. Two conclusions are reached: first, that trade-diverting preferential arrangements are more likely to be supported politically; and second, that such preferential arrangements could critically change domestic incentives so multilateral liberalization that is initially politically feasible could be rendered infeasible by a preferential arrangement. The larger the trade diversion resulting from the preferential arrangement, the more likely this will be the case.

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