Trade Policy of a Free Trade Agreement in the Presence of Foreign Lobbying

This paper studies the e¤ect of foreign lobbies on trade policy of a country which is a member of a Free Trade Agreement (FTA). It uses a monopolistically competitive political economy model in which the government determines external tari¤s endogenously. The e¤ect of foreign lobbying under the FTA is examined empirically using Canadian industry-level trade data that allow di¤erentiating of lobby groups by the country of origin. The analysis suggests that the presence of foreign lobbying has a signi…cant e¤ect on the domestic trade policy. The heterogeneity of foreign lobbies is also important: the presence of an organized lobbying group in an FTA partner country tends to raise trade barriers while an organized lobbying group of exporters from outside of the FTA is associated with less protection. JEL Classi…cation codes: F12, F13, F14, D72 I am grateful to my advisors Werner Antweiler, Matilde Bombardini and Brian Copeland for continuous support and guidance. I am also grateful to Sumeet Gulati, Vadim Marmer, and Daniel Tre‡er for useful discussions on the topic. I also would like to thank seminar participants of the University of British Columbia, McMaster University, New Economic School, Ryerson University, Syracuse University, University of Toronto, York University, University of Victoria, 2007 European Econometrics Society Summer Meetings, and Canadian Economic Association conference for their comments and suggestions. Department of Economics, 997-1873 East Mall, Vancouver BC, Canada V6T 1Z1; tel. +1 604 218 6347; fax +1 604 822 5915; [email protected]