Using a political economy approach, Grether, de Melo, and Olarreaga analyze the pattern of protection in Mexico's manufacturing sector during the period of trade policy reforms (1985-89), when Mexico experienced significant trade liberalization and an important inflow of foreign direct investment.
They take into account the potential effect of foreign direct investment on endogenous tariff formation.
It turns out that the data support this analytic approach, in which the formulation of trade policy reflects political support, and in which the presence of foreign direct investment in the sector strongly affects the pattern of tariff protection before and after reform.
In Mexican manufacturing, especially, sectors with heavy foreign direct investment received greater protection in import-competing sectors, although the move toward greater openness was associated with a reduction in the influence of industrial and foreign-investor lobbying.
This paper - a product of Trade, Development Research Group- is part of a larger effort in the group to understand the political economy of trade protection. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Lili Tabada, room MC3-333, telephone 202-473-6896, fax 202-522-1159, Internet address ltabada@worldbank.org. Marcelo Olarreaga may be contacted at molarreaga@worldbank.org. (36 pages)
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