Abstract
This paper documents the presence of “sensitive sectors” in Free Trade Agreements, defined as sectors for which the within-FTA tariffs remain positive. The paper includes some brief theoretical discussion of the welfare implications of these, but the main emphasis is on reporting two measures of this phenomenon for countries in FTAs that entered into force between 1994 and 2003. One measure is the percentage of tariff lines that remain dutiable, and the second is the change, from before the FTA to after, in the average maximum (across 6-digit products) positive tariffs. Both measures are derived from data in the UNCTAD TRAINS database, and are then related to measures of country characteristics that might explain them. Low per capita GDP countries tend to have larger fractions of dutiable tariff lines, while higher income countries tend to post larger increases in average maximum positive tariffs. Both suggest that the favored treatment of sensitive sectors is undermining the potential gains from trade that FTAs could provide.
Highlights
Free trade agreements have been proliferating for almost three decades, numbering in the hundreds that have been notified to the World Trade Organization
As we teach about the economic effects of FTAs, we assume that all within-FTA tariffs are eliminated
I hope that this paper has successfully made the case that exemption of sensitive sectors from tariff elimination in FTAs is a sufficiently common phenomenon to be concerning
Summary
Free trade agreements have been proliferating for almost three decades, numbering in the hundreds that have been notified to the World Trade Organization. As most defined, an FTA is an agreement between two or more countries to reduce to zero their tariffs and other trade barriers on each others’ exports while leaving unchanged there barriers to exports from other countries. Calling them sensitive sectors already alludes to the most likely explanation for them Those sectors where domestic production is most likely to be adversely impacted by an FTA will be prime candidates for protection, either by slowing down or completely eliminating the reduction in tariffs that protect them. These are sectors where losses of employment by workers and profits by firms are expected to be large if they are made to compete head-to-head with imports from the FTA partner
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