It is the purpose of this chapter to argue that there is an important protectionist bias inherent in FTAs which is not present in CUs. To make the case, it is first necessary to sketch the traditional analysis of the welfare effects of the CUs and FTAs. Thereafter, attention turns to the fact that external tariffs differ among countries in FTAs, and that rules of origin (ROOs) can therefore automatically extend the protection of one trading partner to another FTA member. A straightforward model of incentives under an FTA is then presented, along with an arithmetic example of “exported protection” via an FTA.
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