The impact of free trade agreements on the tariffs of nonmember countries: evidence from NAFTA

How do free trade agreements (FTAs) affect the tariffs imposed by nonmember countries? In light of the significant attention devoted to and the proliferation of FTAs in recent decades, this is a critical yet mostly overlooked question. Using a political-economy model of trade protection, I show theoretically that if the political bias of the governments is large enough, an FTA will cause an increase in the tariffs of nonmembers via a larger supply and higher profit rise generated by those tariffs. I test and confirm the model’s predictions focusing on the case of the North American Free Trade Agreement. The results highlight a new type of mechanism through which FTAs may affect the tariffs of nonmember countries and world welfare.