Exclusions for Sale: Evidence on the Grossman-Helpman Model of Free Trade Agreements

Abstract

Introducing political economy features into the analysis of trade agreements has not only enriched the economic literature on integration by imparting a real world flavor, but it has introduced new hypotheses that have remained outside the realm of the traditional treatment of the subject. An important new hypothesis in the literature on trade integration, advanced by Grossman and Helpman (1995, henceforth also cited as GH95), makes predictions about industries that are prime candidates for exclusions from an otherwise free-trade agreement (FTA). Without such industry exclusions, many successfully concluded free trade agreements may not have even come into existence. The exclusion of politically sensitive industries was a key feature of the Mercosur pact, a trade agreement concluded in 1992 among the four South American countries of Argentina, Brazil, Paraguay, and Uruguay. In this paper, cross sectional data from its two leading countries, Argentina and Brazil, are used to empirically examine the Grossman-Helpman hypothesis.