Stoyanov (2009) - Trade Policy of A Free Trade Agreement in The Presence of Foreign Lobbying

Journal of International Economics 77 (2009) 3749
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Journal of International Economics

j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / e c o n b a s e
Trade policy of a free trade agreement in the presence of foreign lobbying

Andrey Stoyanov
Economics, Atkinson Faculty of Liberal Arts and Professional Studies, York University, 2009-4700 Keele Str., Toronto, ON, Canada
a r t i c l e
i n f o
Article history:
Received 14 April 2008
Received in revised form 7 October 2008
Accepted 8 October 2008
Keywords:
Trade policy
Free Trade Areas
Foreign lobbies
a b s t r a c t
This paper studies the effect 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 tariffs endogenously. The effect of foreign lobbying under the FTA is examined
empirically using Canadian industry-level trade data that allow differentiating of lobby groups by the country
of origin. The analysis suggests that the presence of foreign lobbying has a signicant effect 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.
2008 Elsevier B.V. All rights reserved.
JEL classication:
F12
F13
F14
D72
1. Introduction
In the political economy literature a growing number of studies
view trade policy as an endogenous outcome of lobbying activity by
special interest groups. Several authors (Goldberg and Maggi, 1999,
Gawande and Bandyopadhyay, 2000) have conrmed that lobbying
intensity by domestic rms is one of the main determinants of the
cross-industry pattern of protection. More recently, Gawande et al.
(2006) also nd that lobbying by foreign rms for trade barriers
reduction has a signicant effect on the structure of tariffs across
industries. However, if a country is a member of a regional free trade
agreement (FTA) and foreign rms can affect the government's
decision regarding trade policy, it becomes necessary to distinguish
foreign lobbying from within and outside of the FTA. Organized
foreign interests with preferential market access will lobby for more
protection against other foreign rms, and the trade agreement may
become more protectionist with a strong lobby group in a prospective
FTA partner country. Active foreign lobbying under the preferential
I am grateful to my advisors Werner Antweiler, Matilde Bombardini and Brian

Copeland for continuous support and guidance. I am also grateful to Christopher
Barrington-Leigh, Kishore Gawande, Vadim Marmer, and Daniel Treer 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.
Tel.: +1 416 736 2100x22833; fax: +1 416 736 5188.
E-mail address: Andrey.Stoyanov@atkinson.yorku.ca.
0022-1996/$ see front matter 2008 Elsevier B.V. All rights reserved.
doi:10.1016/j.jinteco.2008.10.001
trade agreement may not only lead to an increase in trade barriers, but
also make welfare-reducing trade agreements politically feasible.
In this paper I analyze the effect of foreign lobbying on domestic
trade policy when the country is a member of a preferential trade
agreement using Canadian post-NAFTA trade data. This analysis
reveals two main results. First, the activity of foreign lobbyists in
Canada is a signicant determinant of the Canadian trade policy, and
sectors in which foreign rms without preferential market access are
politically organized tend to receive less protection. This result
supports the previous nding by Gawande et al. (2006) for the US.
Second, NAFTA has an important effect on the structure of foreign
lobbies. The data conrm that foreign rms with preferential market
access lobby for more protection just as domestic rms do. This result
has important implications for the effect of an FTA on a country's trade
policy. It implies that prior to NAFTA, US rms lobbied for Canadian
trade barriers reduction like all other foreign rms, but once NAFTA
was signed, they switch to lobbying for trade barriers increase. As a
result, an FTA with a large and politically strong partner country may
raise trade barriers and increase trade distortions, making trade policy
of regional trading blocks more protectionist.1
1
Two considerations should be taken into account when partner country lobbying
for more protection is considered. First, the WTO tariff binding constrains the lobbying
opportunities by the partner country rms; however, they may still play an important
role in the future and impede multilateral trade liberalization in those sectors. Second,
the WTO precludes countries from raising their tariffs once the FTA is signed. Yet
foreign lobbies may oppose further tariff reduction as described above and use antidumping and countervailing measures to gain protection.
38
A. Stoyanov / Journal of International Economics 77 (2009) 3749
This paper is the rst one that analyzes from theoretical and
empirical points of view the effect of foreign lobbying on domestic
trade policy in the presence of an FTA. The political economy model
presented in this paper incorporates a monopolistically competitive
market structure into the Grossman and Helpman (1994) protection
for sale setup (henceforth GH) to analyze the role of foreign lobbying
in the making of national trade policy. The framework is further
extended by allowing for two types of foreign interest groups, namely,
lobbying groups formed by rms from an FTA partner country and by
rms from countries outside of the FTA, aggregated into the rest of the
world (ROW). This differentiation of foreign lobbies by market access
is important in the presence of an FTA. When two countries join a
regional trade agreement, granting zero import tariffs to each other,
rms from countries with preferential market access will lobby for
more protection under the FTA to lock it from competition from the
ROW rms, while rms from outside of the FTA will continue to lobby
for trade liberalization. This differentiation of foreign lobbying
objectives, that follows from the presence of the FTA, implies that in
a world where almost every country is a part of at least one regional
trade agreement, a complete theory of the effect of foreign lobbing on
the national trade system should take this differentiation into account.
The model of foreign lobbying in the presence of the FTA is tested
using Canadian post-NAFTA trade data. The empirical analysis
suggests a strong and statistically signicant effect of domestic and
foreign lobbying on Canadian trade policy, and points to the
importance of distinguishing partner country lobbying from ROW
lobbying. Using data on lobbying intensity by sector and by country of
origin, this paper veries that the main predictions of the model are
consistent with the data. First, the importance of both partner country
and ROW foreign lobbying under the FTA is conrmed in the Canadian
data: while the presence of an organized domestic lobbying group
raises industry import tariffs by 35% relative to an unorganized
industry, organized partner-country lobbying would raise it by 12%,
and foreign lobbying from the ROW would lower it by 23%. These
results are economically meaningful and conrm the main prediction
of the model that foreign rms with preferential market access behave
just as domestic rms do, which introduces an additional distortion in
the policy making process.
Second, the empirical evidence shows that even politically
unorganized sectors receive a positive level of protection from the
government of 24% import tariff, providing support for the imperfectly competitive structure of the model. Additionally, an important
contribution of this work to the political economy literature of trade is
its determination of more plausible values for the government's
valuation of political contributions. In this paper, the government is
estimated to value political contributions more than national welfare,
which is in sharp contrast with previous tests of the benchmark GH
specication in which governments were found to have stronger
preferences for welfare (Goldberg and Maggi, 1999; Gawande and
Bandyopadhyay, 2000). This result explains why relatively small
political contributions may have strong policy effects.
My empirical results provide a new perspective on the effect of
regional trade blocks on trade policies of member countries. Most of
the literature on endogenous trade policy concludes that a country is
more likely to reduce its external tariff when it enters an FTA.
Richardson (1993), Bagwell and Staiger (1997), and Bohara et al.
(2004), Bond et al. (2004) show that a welfare-maximizing government will lower external import tariffs once an FTA is formed. By
doing this, the government restores part of the tariff revenue lost due
to the shift in import demand from the ROW to the partner country
rms.
Ornelas (2005a,b) examined the political economy of an FTA
without foreign lobbying using an oligopolistic market structure in the
GH model. He shows that FTA formation weakens the lobbying power
of domestic rms because the elimination of tariffs between FTA
member countries shifts part of the tariff rent from domestic rms
towards rms from a partner country. The model in this paper,

however, allows for cross-border lobbying activity, which lessens the
effect introduced by Ornelas (2005a,b) since the reduction in political
activity by domestic rms is coupled with an increase in contributions
for protection by the FTA partner country rms. As a result, in the
presence of foreign lobbying a country's government may in fact want
to raise external tariffs under the FTA when strong lobbying by an FTA
partner country puts extra pressure on the government for higher
trade barriers.
Activities of foreign interest groups in national policy-making have
received a growing attention in the political economy literature. Many
scholars have evaluated the intensity of foreign lobbying in the US and
argue that it has high potential for policy inuence. Mitchell (1995)
found that foreign afliates in the US contributed 5.6% of total
corporate political contributions in 198788, and 42% of them hired
professional lobbyists to promote their interests in Washington.
Hansen and Mitchell (2000) claim that, although foreign corporations
make lower political contributions than domestic ones due to the
existing legal restrictions, they are just as intensive as domestic
corporations with respect to lobbying activity and lobbying
expenditures.
While it has been argued that foreign corporations are quite
inuential in US politics, very little research has been done on their
effect on trade policy outcomes. In their pioneering work, Gawande
et al. (2006) demonstrate that foreign agents lobbying expenditure in
the US is even greater than political contributions by domestic
corporations, and that the elasticity of the US import tariff with
respect to foreign lobbying is almost as big as with respect to the
domestic one. Their paper was the rst to show that foreign lobbying is
an important factor in the formation of national trade policy and argue
that foreign lobbying may be benecial to the country's trade policy as
a counter-pressure to domestic interests, helping to reduce distortional trade barriers. In contrast, my paper suggests that the above
argument is invalid in the presence of preferential trade agreements,
when rms from a partner country prefer to maintain high
discriminatory tariffs for third-country imports. Since most of the
countries are members of at least one preferential trade agreement,
this paper demonstrates that cross-border lobbying may stimulate
more protectionist trade policies of FTAs and disrupt multilateral trade
liberalization.
The paper is structured as follows. Section 2 provides some evidence
on the lobbying activities of foreign rms in Canada. Section 3 introduces
the modied GH version of the model that allows imperfectly
competitive market structure and two groups of foreign lobbies, and
motivates the empirical methodology. Section 4 describes the data.
Estimation results are presented in Sections 5 and 6 concludes.
2. The role of foreign lobbies in Canada
The rst law that regulates the activity of domestic and foreign
lobbyists in Canada is the Canada Elections Act, introduced in 1960.
This law regulates the amount of political contributions by Canadian
nationals to political parties and explicitly bans the use of political
contributions from foreigners.2
However, this law suffered from a lack of transparency in the
lobbying process and on September 30, 1989, a Lobbying Registration
Act (LRA) came into force. This piece of legislation introduced a
denition of a lobbyist and a requirement for lobbyists to register with
the Lobbyists Registrar. But more importantly, it requires lobbyists to
provide information about the name and business address of the
organization that has a direct interest in the outcome of the lobbyists'
activities on behalf of the client, all of its subsidiaries and corporate
2
No person or party shall accept or use contributions from a person who is not a
Canadian citizen, corporation or association that does not carry on business in
Canada, foreign political party, or foreign government, (S.217).
headquarters, if there is one. An amendment to the LRA, introduced in

1996, made this information publicly available. It also introduced a
strict disclosure of funds policy applied to political parties. Together
with the Canada Elections Act, the LRA made it difcult for foreign
rms to lobby their interests in Canada directly.
Nevertheless, politically active foreign rms can still inuence
trade policy outcomes in at least two ways. First, they can hire
Canadian agents and consultants to lobby the executive branch on
their behalf and affect policy outcomes in a way that suits the interests
of foreign rms. Second, subsidiaries of foreign enterprises can make
legal political contributions with their own funds to defeat legislators
who are unfriendly to their interests. Since there are no restrictions on
the share of foreign capital in the assets of a company that makes
political contributions, any local subsidiary of a foreign corporation
can make political donations from its own funds if it carries business
in Canada. Moreover, almost any big foreign company that exports to
Canada has an independent local sales department, which is legally
allowed to lobby for a reduction in trade barriers on the products
imported by its parent company into Canada. Lobbying efforts of such
subsidiaries will be counter to the efforts of domestic rms and,
therefore, pooling all Canadian rms together regardless of their
ownership may lead to misleading results and estimation problems.
In the trade policy literature, corporate political activity is typically
measured by nancial contributions to candidates and political parties,
while very little attention has been paid to other means of affecting policy
outcomes such as direct lobbying. However, earlier research on the effect
of foreign companies on national policy (Hansen and Mitchell, 2000)
suggests that foreign corporations prefer direct lobbying to political
contributions not only because of legal restrictions on contributions, but
also because of informal legitimacy questions for politicians with respect
to accepting money from corporate sources with foreign ownership.
Hansen and Mitchell found that because lobbying is less visible than
contributions, foreigners use it as intensively (and effectively) as
domestic rms do. For these reasons, lobbying expenditures seem to be
a better measure of foreign political involvement, especially in countries
with legal restrictions on political contributions by foreigners.
Unfortunately, data on lobbying expenditures by domestic and
foreign corporations are unavailable for Canada. To illustrate the role
of this channel in foreign political activity in Canada, I collected the
information on the number of lobbyists ofcially registered with the
Ofce of the Registrar of Lobbyists, as is required by the LRA.3 The
lobbyists registration data is publicly available and is discussed in
more detail in Section 4.2, but the following gures demonstrate the
relative importance of foreign lobbying in Canada. In 199697, there
were 1032 ofcially registered lobbyists representing interests of
manufacturing rms regarding Canadian trade policy, with 47%, 26%
and 27% of them acting on behalf of Canadian, US and ROW rms,
respectively. These gures highlight the potential strength of foreign
lobbyists in Canada and suggest that the number of contacts of foreign
rms with Canadian policymakers was at least not smaller than that of
domestic rms. Then, when almost every country in a world trades
under preferential agreements, it is important to consider the effect of
foreign lobbying under the FTA when a group of foreign rms with
preferential market access may lobby for more protection and
reinforce trade diversion effects.
39
that allow for the presence of foreign lobbying and facilitate

econometric estimation. In their original formulation, Grossman
and Helpman considered a small open economy, which leaves no
room for foreign companies to lobby because pre-tariff prices are
exogenously xed. As such, with perfectly competitive global
markets and free entry, an increase in the domestic tariff rate will
not affect prots of foreign rm from export operations, leaving
them no incentives to participate in trade-policy game. In this work I
develop and build into the GH setup a model of monopolistic
competition with differentiated goods4 to allow foreign rms to gain
or lose from import tariffs.5
There is 1 industry in the model and three countries: Canada
(Home country), the US (FTA Partner country) and the ROW, denoted
by H, P and ROW, respectively. Industries are denoted by index
i {1,, N} and countries by i {H, P, ROW}There are nji rms in
country j and industry i. These rms are assumed to be symmetric
within the same country and industry, i.e. they share the same cost
structure and hence face the same demand functions and charge the
P
ROW
same prices. In total, there are (nH
) different varieties of
i + n i + ni
each product i.
A representative consumer maximizes a quasilinear utility function with a constant elasticity of substitution index nested into a
CobbDouglas function:
N
U = X0 + i lnXi
i=1
1
Xi = nHi dHi i xHi
i 1
i
+ nPi dPi i xPi
i 1
i
i 1
i
i ROW
+ nROW
dROW
xi
i
i
!1i
i
where Xi is an aggregate consumption index for product i, i is the

share of product i in the total consumer's expenditure, xji is the
demand for product i produced in country j, i N 1 is the elasticity of
substitution between varieties of product i, and dij is a country-wide
taste (or quality) parameter for product i imported from country j.
Maximizing Eq. (1) subject to the standard budget constraint, we
obtain the demand functions and an aggregate price index for
product i:
Xi = i Pi 1 ;
xji
i dij
pij
pij
Pi
iz1
!1 i

1 i
1 i
ROW 1 i 11 i
+ nPi dPi pPi
+ nROW
dROW
pi
Pi = nHi dHi pHi
i
i
Firms within one country and sector are assumed to have the same
constant marginal cost. This allows us to consider the Canadian
market independently from other markets, i.e. prices in the Canadian
market depend only on the demand elasticity, the (xed) number of
rms and the xed marginal cost structure. Denoting a specic import
tariff set by the home country government on imports of product i
3. The model
The theoretical model is based on the Grossman and Helpman
(1994) political economy model and presents several modications
3
The Act denes a lobbyist as an individual who, for payment, undertakes to lobby
on behalf of a client and represents an organization in arranging meetings with public
ofce holders, or communicate with a public ofce holder in an attempt to inuence
the development of any legislative proposal, the making or amendment of any
regulation, the development or amendment of any program or policy.
4
The model developed in this section is a generalization of the GH model with
monopolistic competition by Chang (2005) that allows for country bias in consumers
preferences, country-specic productivity and specic import tariff.
5
Similar result can be obtained under other forms of imperfect competition, e.g.
oligopoly, but the advantage of monopolistic competition is that trade policy is
determined by the shares of domestic and foreign rms on the home country market.
In general, market shares are more stable than inverse import penetration ratios
required by the model of perfect competition (Grossman and Helpman, 1994) or
oligopoly (Gawande et al., 2006).
40
from country j as ji, we can write the prot of a country j rm that

sells product i in the Canada as:

ji = pij cji ji qji
5
qji
cji
where is the quantity supplied and is the marginal costs. I assume

that the number of rms is large enough to ignore the effect of their
individual pricing decisions on the industry price index Pi, i.e. each
rm takes the price index as given. Knowing product demand
functions (3), each rm sets the prot-maximizing price as a markup
over its marginal costs:
pHi =
i
i 1
cHi ; pPi =

cPi + Pi ; pROW
=
i
i
i 1

i
i 1
cROW
+ ROW
i
i
For convenience, isolate costs from Eq. (6) and write down
equilibrium prots (5) as:
j j
ji = 1
i pi qi ; 8j
The government chooses import tariffs to maximize a weighted

sum of national welfare W and political contributions C:

G j ; C j = CiH + aW + b CiP + c CiROW
i
P
ROW
where CH
are industry-wide political contributions from
i , Ci and Ci
each country. Coefcient a is a weight that the government assigns to
national welfare relative to political contributions. The government is
allowed to value domestic and foreign contributions differently as
reected by parameters b and c that show the government's
preferences for the US and ROW contributions, respectively, over the
contributions by domestic rms. As long as accepting contributions
from foreign rms involves risk of reputation loss or law infraction,
politicians may prefer domestic contributions to overseas donations
thus both coefcients are presumably less or equal to one.6
Firms in industry i can organize themselves and form a group to
lobby the local government for a change in trade policy.7 Firms within
the FTA pay no import tariffs and hence lobby for more protection,
while rms from other countries lobby for lower tariffs for the
opposite reason. The lobby representing industry i of country j
maximizes its welfare from obtaining protection net of political
contribution: (Wji Cij). As in Grossman and Helpman (1994), the
equilibrium trade policy is a solution to a two-stage game. In the rst
stage, knowing the government's objective function, each organized
lobbying group provides the government with a schedule of political
contributions as a function of import tariff. In the second stage,
observing contribution schedules, the government sets trade policy
that maximizes its objective function (8). Grossman and Helpman
(1994) show that for truthful contribution schedules the optimal trade
policy is the one that maximizes joint surplus of the government and
organized lobbying groups. Let i denote the share of the home
country population entitled to the domestic industry i prots, and Iji
denote an index variable that takes the value of one when industry i in
6
In this simple model it is assumed that the government only values national
welfare and political contributions. However, politicians are also concerned about
political risk from being involved in relationships with foreign agents. If politicians
want to minimize the risk of being disclosed in protecting interests of foreign residents
and this risk is proportional to the amount of foreign contributions, the model can
generate different valuation of political contributions from different sources by
policymakers. Therefore, without modeling political risk explicitly, we can assume that
the government may have a political bias against foreign monetary contributions.
7
With the number of rms in the sector being limited by the endowment of sectorspecic capital, rms in each industry have an incentive to form a lobby group and
seek for protection from foreign competition. Here I ignore the free-riding problem
within each sector. See Bombardini (2008) for an extensive discussion of rm-level
contribution decision.
country j is politically organized and zero otherwise. The joint welfare

function then takes the form:
N
i=1
i=1
i=1
X = IiH WiH + aW + b IiP WiP + c IiROW WiROW
H
H
where WH
i = ni i + i (TR + CS) is welfare of the domestic industry i
gross of political contributions, TR and CS are total tariff revenue and
consumer surplus, respectively, Wji = nijji j (P, ROW) is gross welfare
of foreign industries i from exports to the home county market, and
H
W = i (nH
i i ) + TR + CS is national welfare. Taking the rst order
condition of the joint welfare function with respect to the ROW import
tariff rate and rearranging it, one obtains the expression for the
equilibrium trade policy:
ei
ROW
P
1
a i 1 H
1 i 1 H H
i
=
+ i 1 iP sPi +
s +
I s +
ROW
i
a + i i a + i i i
pi
pi
P
ROW

bIi i 1 P cIi
i 1 ROW
s +
si
1
+
a + i i
a + i
10
nj pj xj
where sji = Pi i Xi i i denotes the share of country j rms on the Canadian

market for product i at the tax-included prices. On the left-hand side
of Eq. (10), (ROW
/pROW
) is the ad-valorem tariff on the ROW imports,
i
i
which is multiplied by the price elasticity of demand for the ROW
imports i. Therefore, as in the benchmark GH model, trade protection
is inversely related to the import demand elasticity.8 The rst term on
the right-hand side is negative: the model predicts that with more
differentiated varieties will receive import subsidy. This result is a
direct consequence of monopolistic competition model with specic
import tariff.9
The second element on the right-hand side shows the positive
relation between the FTA external and internal tariffs and, following
Bagwell and Staiger (1997), reects a tariff complementarity effect: if
the tariff rate for the partner country is high, it is optimal for the
government to raise the external tariff as well. Intuitively, an increase
in the within-FTA tariff rate causes a decline in imports from the ROW,
and tariff revenue collected on the ROW imports is higher for higher
ROW. This, in turn, raises imports from the partner country, that
generates more tariff revenue for higher partner country tariff rate.
The tariff complementarity effect is proportional to the market share
of the partner country rms sPi and is stronger if the partner country
and the ROW exports are close substitutes.
In contrast to the benchmark case, even for unorganized industries
protection may still be positive due to the imperfectly competitive
market structure, as emphasized by the third term, since the
coefcient a +a is positive. Because the share of domestic rms on the
market reects their ability to capture protection benets, and the
tariff is more effective in re-distributing consumers expenditure
towards domestic varieties when substitution elasticity is high, the
tariff level is proportional to sH
i and increasing with . The fourth term
is similar to the benchmark GH model: a politically organized
domestic industry receives more protection from the government.
Moreover, the level of protection is higher if domestic and imported
varieties are close substitutes and if the domestic sector is relatively
large, as the domestic lobby has more to gain from protection in this
case.
8
It should be noted that without the MFN rule, a set of equilibrium tariffs for all
importers would be determined by a system of simultaneous equations with the
number of equations being equal to the number of importing countries. With the MFN
and the FTA, the number of equations goes down to two. However, under complete
trade liberalization agreement, a within-FTA tariff is exogenously set to zero and the
second term on the right-hand side of (10) vanishes.
9
In the model of monopolistic competition, the effect of a specic tariff on price is
amplied by producer's markup. Therefore, for low the price elasticity with respect
to tariff is high and the gain in consumer surplus from a subsidy outweighs the
increase in government's expenditure.
The fth term reects the effect of political activity by partner

country rms on the national trade policy. Ipi enters the equation
positively, making protection more likely in those sectors where
partner country exporters are organized into lobbying groups and
where product varieties are closer substitutes. Similarly to the
domestic lobby, the effect of partner country rms lobbying on the
import tariff is proportional to their market share.
The last term is negative and reects the effect of lobbying efforts
by the ROW rms to reduce protection. As before, the scaling factor i 1
i
reects higher motivation by the ROW rms to lobby for trade
liberalization when the degree of substitution between varieties
within a given industry is high, but unlike domestic and partner
country lobbying, the ROW lobbying intensity declines with the
market share. The intuition behind this result is an increased damage
from protection for small ROW industries, and as a consequence these
industries will resist tariff increase more intensively.10
As in the GH model, domestic and partner country's lobbying
results in overprotection and welfare reduction relative to the rstbest outcome. The presence of an organized foreign lobby from the
ROW may help to (partially) restore the optimal level of import tariffs
and raise national welfare as a counter pressure to domestic or US
lobbying for protection. However, the presence of the ROW lobbying
alone causes underprotection and is thus welfare-reducing. Given that
the number of politically organized domestic or US industries is on
average twice of the number of organized ROW industries, the overall
net effect from the presence of the partner country lobbying is likely to
lead to welfare reduction, whereas the overall welfare effect of the
ROW lobbying activity is unambiguous: the effect is positive if ROW
rms counter-lobby against the effort of domestic and partner country
rms to raise protection and negative if ROW rms form a single
organized lobbying group in the sector.
Eq. (10) motivates the following form of the estimation equation:

Yi = 0 + 1 sHi + 2 IiH sHi + 3 IiP sPi + 4 IiROW 1sROW
i
!

ROW
i
1
ei iROW +
Yi =
i
i 1
pi
1 =
a
;
a+
2 =
1
;
a+
3 =
b
;
a+
4 =
c
a+
11
12
In Eq. (10) the inverse elasticity was taken on the left-hand side
and both sides were multiplied by 1i because substitution elasticity is
i
likely to be measured with error. Using Eq. (12), the four coefcient
estimates of the reduced form (11) can be used to derive four
structural parameters of the model.
4. The data
The empirical section of this paper estimates the effects of
domestic, partner country and ROW lobbying activity on the Canadian
post-NAFTA trade policy. Given the relative size of the US and
Canadian economies, the effect of US lobbying in Canada will be
considerably larger than the effect of Canadian lobbying in the US.
Therefore, focusing on Canadian data is particularly advantageous for
the empirical analysis of foreign lobbying under the FTA. This study is
conducted for 249 Canadian 6-digit NAICS manufacturing sectors
(NAICS 3133) for the period of 199697. The US was treated as a
10
This result follows from the Cobb-Douglas utility function. Fixed product
expenditure shares imply that the import tariff imposed on one variety will raise
consumer's expenditure on all varieties through aggregate price index proportionally
to their market shares because large market share is indicative of the number of
varieties produced in a given country, productivity advantage, and consumers
preferences toward varieties produced in that country. Therefore, the higher is the
ROW market share (and the lower is the share of other varieties), the less harmful is
the import tariff for the ROW exporters.
41
Canadian FTA partner country, while all other countries that have no
preferential trade agreements with Canada were aggregated into
ROW.11 The estimation of Eq. (10) requires the following data: the
measure for trade protection, imports by the country of origin and by
sector, domestic output by sectors, substitution and price elasticities,
political organization dummies, and three sets of instruments for
market shares.
4.1. Protection measures and market shares
Domestic manufacturing shipments data for 249 NAICS-6 industries are provided by Industry Canada. The values of Canadian imports,
as well as customs duties collected, were obtained from Statistics
Canada at the HTS-10 level and aggregated to NAICS-6 using the
concordances tables from the International Trade Division of Statistics
Canada.
Primarily, I use two measures for trade barriers: import tariffs and
the share of imports that is subject to non-tariff trade restrictions.
Although the original GH model was meant to analyze the political
economy of import tariff formation, tariff rates are often argued to be
an imperfect measure of trade protection for the analysis of
endogenous trade policy formation in the presence of WTO tariff
regulation. With limitations on the magnitude of tariffs imposed by
the WTO, organized interests would seek non-tariff protection from
import competition that are adopted unilaterally by different
countries, as opposed to tariffs that are set cooperatively in WTO
negotiations. Nevertheless, I use tariffs as a second measure of
protection. Even in the presence of WTO tariff regulation, tariffs can
still reect lobbying activity of Canadian and US interest groups
through smaller (larger for ROW lobbying) tariff reductions during
WTO negotiations that take place after trade agreement is signed. If
the government takes interests of domestic and partner country
(ROW) lobby groups into account during negotiations, then organized
industries are likely to receive smaller (larger) tariff reductions during
WTO negotiations.
In light of this, I used tariff, Non-Tariff Barriers (NTBs) and
protection coverage share as a measure of protection. Ad-valorem
tariff rates were obtained as the ratio of aggregated duty collected by
customs over the value of imports.12 NTBs for Canadian imports were
obtained from the TRAINS database maintained by UNCTAD, which
shows the proportion of imports that is covered by one or more
qualitative restrictions. These data were available at the HS-6 level and
were aggregated into NAICS-6 groups. In addition, the protection share
variable was constructed as the share of Canadian imports that is
subject either to the positive import tariff or NTBs.
Descriptive statistics for protection measures and market shares
are presented in Table 1. In 1997 the average tariff rate, NTBs and
protection coverage ratios for the ROW imports were 4.8%, 18.2% and
77.5%, respectively. Tariffs and NTBs are highly correlated both within
and outside of the FTA, which implies that different measures of
protection are still highly complementary.
4.2. Political organization dummies
Many previous studies that have tested the GH model empirically
used rm-level political contributions to assign the value for the
political organization dummy variable.13 Although these data are
11
Mexico also have preferential market access in Canada in 1997 but since there is no
evidence on the presence of Mexican lobby in Canada in the data. Israel is another
country that had trade agreement with Canada at that time and there are Israeli rms
lobbying trade interest in Canada. But since this FTA came into force on January 1, 1997,
it is hard to classify these rms according to market access using 1996-97 data.
Therefore, I treat US as a single Canadian FTA partner country.
12
Therefore, tariff measure controls for some non-tariff distortions as well, such as
antidumping or countervailing duties.
13
For example, Goldberg and Maggi (1999), Gawande and Bandyopadhyay (2000),
Facchini et al. (2006), Bombardini (2008).
42
Table 1
Descriptive statistics for protection measures and market shares, 1997
Mean
Median
Standard Deviation
Minimum
Maximum
Corr. with tariff
Corr. with NTB
Corr. with protection share
No. of observations
US
Tariff
ROW
Tariff
US
NTB
Coverage
ROW
NTB
Coverage
US
Protection
Share
ROW
Protection
Share
0.013
0.003
0.076
0
1.17
1
0.46
0.14
248
0.048
0.034
0.053
0
0.54
1
0.68
0.45
248
0.172
0
0.314
0
1
0.46
1
0.45
248
0.182
0
0.307
0
1
0.68
1
0.35
248
0.563
0.646
0.419
0
1
0.14
0.45
1
248
0.775
0.986
0.328
0
1
0.45
0.35
1
248
available for Canada for 1997 and afterwards, this paper uses a
different approach. As was previously mentioned, foreign corporations prefer direct lobbying to political contributions because
transparency of political contributions may raise concerns about
foreign interference into political processes. Furthermore, since
different means of political involvement are highly correlated (Hansen
and Mitchell, 2000), direct lobbying seems to be an appropriate
measure for domestic political activity as well.
In this work, the degree of political activity in an industry is
measured by the number of lobbyists representing the corporate
interests of that industry. The Lobbyists Registration Act (LRA) requires
every individual to register at the Lobby Registrar Canada if the person
seeks a meeting or a phone call to any public ofce holder regarding
the development, modication or cancellation of legislative proposals,
regulations, public policies and programs. The assumption that
political contributions will be ineffective for the determination of
trade policy without such contact seems to be reasonable and,
therefore, political contributions should be followed up by a personal
contact with a policymaker. For this reason, the number of registered
lobbyists is used to measure rm-level lobbying intensity within an
industry.
The main advantage of this data set is the large amount of detailed
information lobbyists are required to submit. This includes information on the business address of a corporation that benets from
lobbying, its subsidiaries and headquarters, and the objective of the
meeting with a public ofce holder. This information is very helpful in
determining the nationality and industrial afliation of lobbyists
representing interests of multi-product multinational corporations.
Another advantage of this data set is that it gives a very narrow
denition of a lobbyist. Any person representing his or her own
interests, and who is not being paid for arranging the meeting with
the public ofce holder, is not obliged to register. This removes
information on the very small rms. Large rms, which have high
lobbying power and can effectively inuence the decisions of policymakers, typically use the service of professional consultants or
corporate lobbyists, who are required to register.
Firms were assigned a NAICS-6 industry code using the Canadian
Company Capability database maintained by Industry Canada. As a
Table 2
Descriptive statistics for the number of lobbyists, 199697
Average number of lobbyists per sector

Median number of lobbyists
Standard Deviation
Minimum
Maximum
Total number of lobbyists
% of sectors with at least one lobbyist
% of sectors with at least two lobbyists
% of sectors with at least three lobbyists
Canada
US
ROW
1.94
1
3.30
0
18
481
0.50
0.38
0.23
1.08
0
2.06
0
12
267
0.32
0.26
0.19
1.15
0
2.32
0
14
284
0.35
0.26
0.15
Canadian
Market
Share
0.661
0.683
0.222
0
1
248
US
Market
Share
0.223
0.205
0.162
0
0.70
248
ROW
Market
Share
0.116
0.075
0.134
0
0.64
248
result, each lobbyist is matched to at least one industry, and for

companies that report multi-industry activity the number of lobbyists
was replicated over all sectors of operation. Assigning an industry
code to some multi-product rms still involves some degree of
discretion. For example, some rms in the automobile sector operate
in more than ten NAICS-6 industries. Since the number of such rms is
relatively small, I assigned each rms to no more than three main
NAICS codes using different information sources: the Canadian
Company Capability database, the Federal Corporations Registry and
the North America Compustat database. The databases listed above
allow assigning industry codes to US and ROW rms. The LRA also
requires lobbyists to declare a subject-matter in respect to which an
individual undertakes to communicate with a public ofce holder. In
many cases, information on the purpose of lobbying activity reported
in the lobbyist registration form allowed me to attribute a multiproduct rm to a single (or a small number of ) NAICS codes where
rm's lobbying activity is mostly focused on.
National afliation of each rm that a particular lobbyist is
representing was determined from location of its manufacturing
facilities14 and constructed from two sources. First, the lobbyist registration form requires registrants to provide the name and business
address of the parent corporation and those subsidiaries which directly
benet from the lobbying. Sometimes, lobbyists provide incomplete
information and do not include information on domestic and/or foreign
subsidiaries. In this case the data was complemented by the information
from other databases mentioned previously. Again, quite often the
nationality of the rm was determined by the objective section of the
lobbyist registration form.15
There are two more advantages of using lobbyists' registry data
over using political contribution data. First, all lobbyists are required
to identify the broad subject matter of their lobbying activity and in
this paper I restrict the sample to only lobbyists concerned with trade
policy issues. It allows one to isolate effectively rms lobbying
particularly for a change in trade policy from those lobbying for other
broad policy issues such as tax policy, environment, etc. This is
especially a problem for domestic lobbyists: on average, only one out
of eight lobbyists, representing the domestic manufacturing sector, is
concerned with trade policy. Therefore, pooling political contributions
by all domestic rms may cause serious measurement problems in the
political organization variable for trade policy analysis.
Second, the main channel used by foreign rms to lobby their
interest in Canada is through local subsidiaries, which distribute the
14
For example, a US company that has manufacturing facilities in Canada is treated
as Canadian rm.
15
For instance, a lobbyist of Toyota Canada Inc, Ontario-based subsidiary of Toyota
Motor Corp., was attributed to the ROW on the basis of the meeting purpose to secure
international trade for automobile engines as these engines are manufactured and
shipped from Japan. Moreover, this lobbying objective statement allows to pin down
the lobbyist to one specic NAICS6 industry.
imported goods within Canada. Formally, these rms should be

assigned to the service sector (NAICS 4145) and dropped from the
sample, but this would substantially underestimate lobbying efforts
by foreign rms. For each service rm concerned with international
trade policy issues I used the company prole and lobbying objectives
information to assign an appropriate manufacturing industry code
and country if the rm has a manufacturing headquarter. Therefore,
lobbying data allows to control more effectively for foreign lobbying
activity in Canada.
The amendment to the LRA announced in 1995 introduced several
important renements that made it more desirable to use post-1995
lobbying data. First, for the purpose of transparency, the lobbyists'
registry database became available for research purposes. Second, this
amendment extended the amount of information that must be
reported. But most importantly, it made disclosed information more
complete and reliable. For the rst time lobbyists were obliged to
provide all the information, and effective enforcement devices were
introduced to encourage better compliance. It extended the power of
the Lobbyists Registrar, which was authorized to seek clarication of
information submitted. The registrar was allowed to conduct an audit
of provided information and, when necessary, investigate the
provided information and impose sanctions for violating the LRA.16
For these reasons, the data for political activity by rms were
collected for the 1997 election cycle and complemented with the 1996
lobbying data to take into account a possible small lag in trade policy
response to lobbying efforts. Therefore, for each industry I calculated the
total number of Canadian, US and ROW lobbyists and, similarly to other
studies, several thresholds for the number of lobbyists in an industry
were set to determine the values of political organization dummies.
Descriptive statistics for the number of lobbyists is provided in Table 2.
4.3. The elasticities of substitution
To my knowledge, there are no studies to date that estimate
substitution elasticities for Canadian NAICS-6 industries, especially
within a framework of monopolistic competition. In this study,
substitution elasticities were estimated using the approach by
Feenstra (1994), recently applied by Broda and Weinstein (2006) to
a large set of US imported commodities.
Table 3 presents the summary statistics.17 As a robustness check, I
estimated the substitution elasticities for NAICS industries at various
level of aggregation and veried that more aggregated commodities
are more differentiated: the average value of decreased from 5.85 to
5.34 and 4.56 while moving respectively from six to ve and four
digits NAICS. As another robustness check, I estimated US elasticity of
substitution using the same estimation procedure, time period, and
industry classication. Presumably, consumers in Canada and the US
should have similar tastes, and varieties that are close substitutes in
Canada should be close substitutes in the US as well. This suggestion is
supported by 0.69 correlation coefcient.
4.4. Instrumental variables
In Eq. (10), market shares are likely to be determined simultaneously with the tariff rates and should be properly instrumented.
Treer (1993) proposed to instrument the import penetration ratio
with industry factor endowments as the measure of comparative
16
In 2001 an independent study of compliance to the LRA was conducted by KPMG
Consulting Inc. (2001). The already-registered lobbyists were asked if they were aware
of any non-compliance behavior. Reported results indicate that 50% of consultant
lobbyists and 15% of corporate lobbyists were aware of non-registered lobbying, while
they evaluated the aggregate compliance rate at 70% and 100%, respectively. In general,
compliance was perceived to be high, although non-compliance behavior is still an
important issue.
17
Price elasticities of ROW
the ROW
ROW import demand were calculated from consumers

Aq
pi
demand function: ei = ApiROW qROW
.
= i i 1sROW
i
i
43
Table 3
Descriptive statistics for the elasticity of substitution and price elasticity
Mean
Standard Deviation
Median
Minimum
Maximum
No. of observations
Elasticity of substitution
Elasticity of import demand
5.83
3.06
4.98
1.43
21.47
248
5.32
2.97
4.52
0.17
21.36
248
advantage independent of the level of protection. Following this

approach, a list of instruments for the Canadian market share
includes: the share of production to non- production workers, the
capital stock in machinery and construction, inventories, and the
consumption of fuel and electricity. All of these data are provided by
Statistics Canada. The same list of instruments was constructed for the
US market share in Canada using the US Census data.
To instrument the ROW share in the Canadian market, the
gravity-type distance measure between Canada and the average
exporter was constructed. For every product, the pair-wise logdistance between Canada and the exporting country was weighted by
the share of this country in the global export of the product.18 The total
exports by country and by sector were constructed using the UNCTAD
database. The data on geographic distance, weighted by population
density and economic activity within each country, were taken from
the Centre d'Etudes Prospectives et d'Informations Internationales.
The rationale for using this distance variable is the following: if main
producers of a particular good are located far from Canada,
transportation costs are high and the ROW share in the Canadian
market is likely to be small regardless of Canadian trade policy.
Political organization dummies are likely to be measured with error
and are potentially endogenous. To instrument the US and Canadian
political organization dummies, I use the information industrial
concentration, such as shares of big and medium rms and the CR-4
concentration ratio. Industrial concentration is mostly technologically
determined and at the same time it is easier for rms in more
concentrated industries to overcome free-riding problem and form a
lobby group. The ROW lobbying intensity is instrumented with the
country-level CR-4 concentration ratio on Canadian imports market.
The right-hand side variables of Eq. (11) include non-linear
combinations of endogenous variables and to consistently estimate
its coefcients I use LIML estimator proposed by Kelejian (1971) with
Bekker (1994) standard error correction.19 Hansen et al. (2006)
demonstrated that this approach has better small sample properties
than 2SLS and is asymptotically correct in the presence of many
instruments and many weak instruments.
5. Results
5.1. Test of a benchmark GH model
As a starting point, I will present the results on a GH version of the
model with homogeneous goods to test how well the new data on
Canada can t the benchmark model and compare its performance
with the results of previous empirical studies. Since in the benchmark
model markets are perfectly competitive and import supply is
innitely elastic, there is no reason for foreign rms to participate in
lobbying, and in the benchmark case I will consider only the effect of
domestic lobbying groups on the home country trade policy.
18
Since the exporter's share on the Canadian market is endogenous, I use the share
on the global market excluding Canada, which is unaffected by Canadian tariff rate.
19
To account for non-linearity of the endogenous variables, the list of instruments
also includes quadratic terms and cross products of exogenous variables, selected on
the basis of their correlation with endogenous variables.
44
Table 4
Estimation results for the benchmark GH model with different protection measures
Dependent variable
Tariffs
XiH
Mi
XiH H
Mi Ii
NTBs
Protection share
(1)
(2)
(3)
(1)
(2)
(3)
(1)
(2)
(3)
0.0059
(0.0024)
0.0097
(0.0081)
0.0057
(0.0024)
0.0111
(0.0087)
0.006
(0.0024)
0.0102
(0.0088)
0.0349
(0.0139)
0.0271
(0.0448)
0.0348
(0.0136)
0.0313
(0.0486)
0.0354
(0.0142)
0.0249
(0.0484)
0.0163
(0.0200)
0.0826
(0.0709)
0.0164
(0.0198)
0.0864
(0.0784)
0.0177
(0.0204)
0.0831
(0.0768)
0.51
(0.946)
89.3
(125.3)
248
192.0
1.573
0.59
(1.221)
97.8
(161.9)
248
194.8
1.596
1.29
(3.708)
35.6
(95.05)
248
637.8
5.168
1.11
(2.897)
30.9
(73.88)
248
635.9
5.152
1.42
(4.629)
38.8
(119.4)
248
640.7
5.191
0.20
(0.928)
11.9
(25.12)
248
688.2
5.574
0.19
(0.833)
11.4
(23.00)
248
693.1
5.614
0.21
(0.928)
11.8
(25.88)
248
689.4
5.584
Structural parameters
a
N
Log-likelihood
AIC
0.61
(1.279)
102.5
(168.7)
248
191.6
1.569
Notes: , and denote statistical signicance at 10%, 5% and 1%, respectively. Standard errors in parenthesis. In columns (1), (2) and (3) industry is considered as politically
organized if it is represented by 1, 2 and 3 lobbyists, respectively.
Following Grossman and Helpman (1994), the optimal import tariff

for a small open economy with politically organized sector-specic
factors of production takes the following form:
ei
ROW
XiH
1 XiH H
i
=
+
I
a
+
a
+
Mi i
M
pROW
i
i
13
where XH
i is a domestic value of shipments and Mi is a total value of
imports from the ROW. The model predicts that the inverse import
penetration ratio enters the equation negatively, while the coefcient
on its interaction with political organization dummy is positive. Table 4
represents estimation results for Eq. (13) using tariffs, NTBs and
protection share data as a measure of Canadian trade barriers.
As in Goldberg and Maggi (1999), several thresholds were used for
the number of lobbyists in the construction of political organization
dummies to verify that the results are not driven by the way these
dummies are assigned. In the rst column of Table 4 an industry is
considered to be politically organized if it is represented by at least
one lobbyist. For the second and third columns the threshold is two
and three lobbyists, respectively.
First, consider the estimation with tariffs as a protection measure.
The estimates of the regression model (13) are of correct signs across
all specications: politically organized sectors receive more protection, while protection in unorganized sectors is negative and increases
with import penetration. The latter result is statistically signicant at a
5% condence level. In organized sectors protection declines with the
import penetration, but this result is not statistically signicant. The
model estimates are very robust to the way political organization
dummies are constructed. When trade barriers are measured with
NTBs and protection share, results correspond closely to those
obtained for the tariff equation: the parameter estimates preserve
correct signs, but are estimated with less precision when trade
barriers are measured with protection share. Overall, the estimates of
the structural model (13) using Canadian data are generally in the line
with the results of the studies by Goldberg and Maggi (1999) and
Gawande and Bandyopadhyay (2000).
The estimates of the structural parameters of the model vary
considerably across different measures of protection. However, the
variances of these parameters are very high and one cannot reject
hypotheses that both and a are the same across all specications
considered. The fraction of the population represented by a lobby, , is
estimated to be around 0.6 for the specications with tariffs, 0.2 for
specications with protection shares, and greater than one for specications with NTBs. In general, 95 condence interval for includes the
whole [0; 1] interval and the model does not allow one to obtain a precise
measure for . Nevertheless, the obtained results do not contradict the
previous estimates of by Goldberg and Maggi (1999) and Gawande and

Bandyopadhyay (2000), who estimated the share of the population
represented by interest groups to be around 0.85 and unity, respectively.
The estimates of the government's political bias vary from 10 in the
specication with shares to 100 in specication with tariffs. The values
of the parameter a greater then ten imply that the government assigns
approximately equal weights to political contributions and to a
national welfare net of political contributions, which supports the
results of studies that use US data.20
Overall, the results of the GH model with Canadian data are
broadly consistent with those obtained by Goldberg and Maggi (1999)
and Gawande and Bandyopadhyay (2000) and other studies for the
US. These results will serve as a benchmark against which the results
of the monopolistic competition model with foreign lobbying and FTA
participation will be compared in the next section.
5.2. Estimation results for the monopolistic competition model with
foreign lobby
In this section I present the estimation results for the political
economy model of trade with monopolistic competition, FTA
membership and two groups of foreign lobbies. The results from the
Eq. (11) appear in Table 5, in which several measures are used to
measure trade barriers. Columns with different numbers denote
different threshold levels for construction of the political organization
variable. Columns (1) and (2) report the results when an industry is
assumed to be politically organized if it has at least one and three
lobbyists, respectively. In column (3) a country's j industry is
organized if it is represented by at least three lobbyists and accounts
for strictly more than one third of a total number of lobbyists in that
industry. With this measure industries with positive but relatively
small number of lobbyists relative to the whole industry are still coded
as not organized.
First, note that for any measure of protection and political
organization, the coefcient 1 is positive and almost always
statistically signicant, implying that domestic industries receive a
positive level of protection regardless of political economy factors.
This is consistent with the assumption of imperfect competition and
prediction of the model that the welfare-maximizing government
always nds it worthwhile to protect home country producers against
competing importers when domestic and foreign products are close
20
The government's objective function C + aW is equivalent to a1C + a2(W- C ), in
2
which a = a1aa
, a1 is the weight on political contributions and a2 is the weight on a
2
welfare net of political contributions. Therefore when a is much greater than one,
a + 1
a1 = a a2 a2 .
45
Table 5
Estimation results for the monopolistically competitive model (10) with foreign lobbying and different protection measures
Dependent variable
Tariffs
SH
i
H
IH
i Si
IPi SPi
IROW
(SROW
1)
i
i
NTBs
Protection share
(1)
(2)
(3)
(1)
(2)
(3)
(1)
(2)
(3)
0.072
(0.093)
0.472
(0.059)
0.150
(0.158)
0.109
(0.051)
0.179
(0.085)
0.557
(0.070)
0.156
(0.167)
0.264
(0.067)
0.210
(0.084)
0.528
(0.069)
0.345
(0.174)
0.246
(0.073)
0.828
(0.636)
2.320
(0.403)
3.047
(1.079)
0.005
(0.345)
0.939
(0.570)
3.512
(0.468)
2.152
(1.119)
0.914
(0.447)
0.868
(0.524)
2.895
(0.429)
3.033
(1.082)
0.715
(0.453)
0.915
(0.848)
2.966
(0.537)
4.064
(1.438)
1.910
(0.460)
1.757
(0.802)
3.091
(0.655)
5.041
(1.568)
2.542
(0.626)
1.741
(0.792)
3.086
(0.648)
5.515
(1.634)
2.491
(0.684)
1.50
(0.244)
0.40
(0.201)
0.65
(0.355)
0.47
(0.156)
248
68.9
0.60
0.07
(0.313)
0.36
(0.351)
1.31
(0.591)
0.00
(0.153)
248
550.7
4.48
0.02
(0.188)
0.27
(0.200)
0.61
(0.352)
0.26
(0.131)
248
542.1
4.41
0.05
(0.208)
0.30
(0.222)
1.05
(0.428)
0.25
(0.164)
248
522.1
4.25
0.03
(0.330)
0.31
(0.360)
1.37
(0.623)
0.64
(0.193)
248
622.0
5.06
0.25
(0.317)
0.57
(0.350)
1.63
(0.691)
0.82
(0.261)
248
625.7
5.09
0.24
(0.310)
0.56
(0.340)
1.79
(0.698)
0.81
(0.290)
248
624.3
5.08
a
b
c
N
Log-likelihood
AIC
1.97
(0.270)
0.15
(0.238)
0.32
(0.356)
0.23
(0.112)
248
74.2
0.64
1.47
(0.228)
0.32
(0.191)
0.28
(0.314)
0.47
(0.131)
248
70.1
0.61
Notes: , and denote statistical signicance at 10%, 5% and 1%, respectively. Standard errors in parenthesis. In columns (1) and (2) an industry is politically organized if it is
represented by 1 and 3 lobbyists, respectively. In column (3) an industry is politically organized if it is represented by at least 3 lobbyists and accounts for strictly more than one third
of the total number of lobbyists in that industry.
substitutes and markets are imperfectly competitive. The positive

level of protection for unorganized sectors is in contrast to the
benchmark GH model and nds strong support in the data. As the
theory predicts, among politically unorganized sectors protection
increases with the share of domestic rms on the market. When
protection is measured with tariffs, the point estimate for 1 in the
most preferred specication in terms of the log-likelihood function
(column (3)) is 0.21, which converts to the welfare-maximizing advalorem import tariff of 2.2% for an average Canadian industry, given
the average Canadian market share, price and substitution elasticities
of 0.66, 5.32 and 5.83, respectively. In terms of the optimal level of
NTBs and protection share, the welfare-maximizing NTB coverage for
the average industry is estimated to be 8.9% of total imports from
outside of the FTA, while the welfare-maximizing share of imports
subject to any trade restriction is 17.9%.
The effect of a politically organized domestic lobbying (coefcient
2) is always estimated to be positive and very signicant, independently of the construction of the political organization dummy and the
measure of trade distortion. Everything else being equal, active
domestic lobbying in the industry leads to a higher level of protection
and this effect is signicant and robust across all specications. Table 6
shows the change in the tariff rate and NTB had the average domestic
or foreign industry changed its status from unorganized to organized.

The results imply that the presence of a politically organized domestic
lobby tends to increase import tariffs by 5.4% for the average industry,
the NTB coverage ratio by 29.7%, and the protection share by 31.7%.
The novel results of this section are the estimates of coefcients 3
and 4. The coefcient 3 measures the effect of the FTA partner
country's lobbying and is always estimated to be positive, although
with tariffs as a measure of protection it is insignicant in two
specications. As expected, the effect of US lobbying is much stronger
on NTBs than on tariffs. This is consistent with the initial hypothesis
that in the presence of tariff regulation by the WTO, domestic and
partner country lobbyists can affect tariffs only by resisting to
multilateral trade liberalization during post-NAFTA WTO rounds of
trade negotiations. In the short run, the effect of US lobbying on
Canadian import tariff may be not as pronounced as the effect on
NTBs, adopted unilaterally by Canadian government.
The effect of the ROW lobbying (coefcient 4) is always negative
and signicant at 5% except for two specications with NTBs,
presumably because foreign lobbies are more effective in lobbying
Table 7
The effect of domestic and foreign lobbying on Canadian average levels of protection
Protection measure (industry average, %)
Table 6
The effect of an active lobbying group presence on the level of protection in an average
industry
Protection measure (industry average, %)
Tariffs (4.81)
(1)
(2)
NTB (18.19)
(3)
(1)
(2)
Protection share (77.53)

(3)
(1)
(2)
(3)
4.85
5.72
5.42 23.83
36.07 29.73
30.46
31.74
33.49
Active
domestic
lobbying
0.52
0.54
1.19 10.54
7.44 10.49
14.06
17.44
25.65
Active
partner
country
lobbying
Active ROW 1.5
3.62 3.38 0.68 12.55 9.81 26.22 34.9 42.77
lobbying
Tariffs (4.81)
(1)
Average
effect of
domestic
lobbying
Average
effect of
partner
country
lobbying
Average
effect
of ROW
lobbying
(2)
NTB (18.19)
(3)
(1)
(2)
Protection share (77.53)

(3)
(1)
(2)
(3)
2.65
1.41
1.33
13.04
8.88
7.31
16.67
7.81
7.8
0.22
0.13
0.21
4.53
1.82
1.87
6.04
4.26
3.4
0.06
0.65
0.48
2.24
1.38
10.51
6.24
4.81
46
Table 8
Estimation results for the monopolistically competitive model (10) with additional controls
Dependent variable
Tariffs
SH
i
H
IH
i Si
IPi SPi
IROW
(SROW
1)
i
i
CR4
K/L
Wage
N
Log-likelihood
AIC
NTB
Protection share
(1)
(2)
(3)
(1)
(2)
(3)
(1)
(2)
(3)
0.210
(0.099)
0.412
(0.058)
0.194
(0.159)
0.100
(0.051)
0.029
(0.011)
0.075
(0.045)
0.094
(0.0061)
248
61.4
0.56
0.307
(0.089)
0.506
(0.067)
0.224
(0.163)
0.260
(0.065)
0.038
(0.011)
0.067
(0.043)
0.106
(0.0059)
248
53.0
0.49
0.210
(0.091)
0.393
(0.056)
0.307
(0.156)
0.202
(0.055)
0.032
(0.010)
0.075
(0.042)
0.087
(0.0058)
248
48.9
0.46
1.503
(0.686)
2.024
(0.406)
3.254
(1.104)
0.044
(0.355)
0.017
(0.007)
0.013
(0.310)
0.060
(0.0042)
248
542.3
4.44
1.555
(0.610)
3.302
(0.460)
2.636
(1.116)
0.878
(0.449)
0.022
(0.007)
0.198
(0.296)
0.068
(0.0040)
248
530.3
4.34
1.247
(0.658)
2.165
(0.405)
3.432
(1.127)
0.458
(0.397)
0.021
(0.007)
0.051
(0.306)
0.054
(0.0042)
248
538.7
4.41
1.999
(0.909)
2.506
(0.538)
4.401
(1.463)
1.849
(0.470)
0.014
(0.008)
0.018
(0.004)
0.263
(0.056)
248
612.1
5.00
2.727
(0.857)
2.630
(0.646)
5.165
(1.568)
2.563
(0.631)
0.020
(0.010)
0.017
(0.004)
0.397
(0.057)
248
614.7
5.02
1.941
(0.856)
2.498
(0.527)
5.727
(1.467)
1.989
(0.517)
0.009
(0.005)
0.018
(0.004)
0.202
(0.054)
248
603.9
4.93
of a total number of lobbyists in that industry.
for tariff using WTO mechanisms. According to these results, the

presence of politically organized US industries in Canada leads to
higher Canadian import barriers and the ROW lobbying effort is
negatively correlated with the Canadian protection measures. Thus, it
seems safe to conclude that, while our results do not allow researchers
to get a precise estimate of 3, they strongly support the hypothesis of
foreign lobby differentiation with respect to market access implied by
the FTA and predicted by the theoretical model of Section 3. The point
estimates of coefcient 3 in specications with the best data t are
0.345 (column (3) for tariffs), 3.033 (column (3) for NTBs) and 5.041
(columns (2) for protection share). Table 6 shows the implication of
these estimates for the observed levels of protection. A politically
organized industry in the FTA partner country tends to increase a
country's average import tariff for that industry by 1.2%, average NTB
coverage by 10.5% and average protection coverage by 17.4%. Similarly,
the presence of a politically organized group of exporters from outside
of the FTA tends to decrease the average Canadian import tariff by
3.4%, the average NTB by 9.8% and the average protection share by
34.9% . These numbers are economically plausible and provide
additional support to the estimates of the model.
Estimates of Eq. (11) allow one to derive the values of the structural
parameters of the model. As expected, absolute magnitudes of
coefcient 4 are always less than 2. Since the strength of domestic
lobbying is normalized to one, c b 1 implies that ROW lobbying is
relatively less important for Canadian policymakers than lobbying by
domestic rms. With the values of c between 0.25 and 0.5, foreign rms
need to spend 24 time more on lobbying than domestic rms to have
the same effect on policy outcomes. This result is not surprising given the
legislative restrictions on contributions by foreign rms in Canada. In
spite of that, policymakers' valuation of contributions from abroad is still
positive and signicantly different from zero. The estimates of the
government's preferences towards political contributions from the FTA
partner country (parameter b) depend on the protection measure that
US rms are trying to affect. In lobbying for tariffs, partner country
contributions are estimated to be 3580% less effective than domestic
contributions, while in lobbying for NTBs the effectiveness of domestic
and partner country lobbying is approximately equal. Finally, when
trade distortions are measured by protection share, the government's
valuation of political contributions from the FTA partner country relative
to domestic ones rises to 1.63. However, in neither case the hypothesis
that b = 1 can be rejected at 95% condence level, suggesting either lower
levels of political risk associated with protecting interests of US rms in
Canada, or high interest and ownership interconnections amongst

Canadian and US rms.
At the same time, US contributions seem to be more important
than contributions from the ROW. Depending on the specication, the
government's valuation of US contributions is estimated to be two
times the valuation of contributions from other countries. Among
possible reasons are greater proximity of the US and Canadian
nancial systems and a more sophisticated mixture of asset structure
that makes it more difcult to distinguish between Canadian and US
rms (relative to the distinction between Canadian and ROW rms).
The estimates of the population share organized into lobbying vary
substantially across different specications. In tariff equations, the
parameter o is always greater than one, but the standard error is very
large and 95% condence intervals almost always overlap with the
[0;1] interval. In equations with NTBs and protection shares, point
estimates for o are also very imprecise and in all specications one
cannot rule out the possibility that is negative.21
As for the relative importance of national welfare for the government,
the parameter a is estimated to be 0.30.5 with reasonable degree of
precision as compared to the benchmark GH model. It implies that when
organized interests lobby for a change in tariff policy, the government's
valuation of political contributions is three to ve times higher than the
valuation of national welfare net of contribution. The result that
policymakers are driven mostly by political contributions they receive
from different lobby groups sharply contrasts with results obtained
previously in a perfectly competitive setup: Gawande and Bandyopadhyay
(2000) estimated a to be over 3, 000; in Goldberg and Maggi (1999) its
value is around 70. My own estimates for Canada fall in the range 30100
(see Section 5.1). However, Gawande and Bandyopadhyay (2000)
recognized that high estimates of a contradict the empirical evidence
that welfare loss from protection is always greater than the amount of
political contributions policymakers receive in exchange for protection,
and only with low values of a we would observe enough variation in tariffs
relative to welfare-maximizing rates.
Estimates of the reduced from Eq. (11) shown in Table 5 have a
meaningful economic interpretation for an average Canadian industry.
Given the average market shares of the three groups of rms, price
21
High volatility in the estimates of a across different measures of trade protection
can be a scale effect as appears in denominator of all reduced form coefcients. It
also should be pointed out that measuring is a standard problem in the literature
and its estimation proved to be difcult.
47
Table 9
Estimation results for the monopolistically competitive model (10) with additional controls and without elasticity adjustment of the dependent variable
Dependent variable
Tariffs
SH
i
H
IH
i Si
IPi SPi
IROW
(SROW
1)
i
i
CR4
K/L
Wage
N
Log-likelihood
AIC
NTB
Protection share
(1)
(2)
(3)
(1)
(2)
(3)
(1)
(2)
(3)
0.009
(0.014)
0.057
(0.008)
0.002
(0.022)
0.012
(0.007)
0.031
(0.015)
0.003
(0.006)
0.225
(0.085)
248
428.7
3.39
0.006
(0.012)
0.067
(0.009)
0.003
(0.023)
0.039
(0.009)
0.044
(0.015)
0.007
(0.0609)
0.237
(0.082)
248
436.8
3.46
0.008
(0.013)
0.051
(0.008)
0.006
(0.022)
0.033
(0.008)
0.037
(0.014)
0.000
(0.059)
0.216
(0.080)
248
441.7
3.50
0.065
(0.084)
0.261
(0.050)
0.336
(0.136)
0.036
(0.044)
0.019
(0.009)
0.002
(0.004)
0.107
(0.005)
248
22.2
0.24
0.070
(0.075)
0.408
(0.057)
0.243
(0.137)
0.138
(0.055)
0.028
(0.009)
0.004
(0.004)
0.114
(0.005)
248
10.4
0.15
0.031
(0.081)
0.267
(0.050)
0.327
(0.139)
0.075
(0.049)
0.026
(0.009)
0.001
(0.004)
0.098
(0.005)
248
19.0
0.22
0.355
(0.081)
0.301
(0.048)
0.231
(0.131)
0.208
(0.042)
0.052
(0.089)
0.024
(0.004)
0.324
(0.050)
248
13.3
0.17
0.239
(0.079)
0.233
(0.060)
0.280
(0.145)
0.292
(0.058)
0.037
(0.093)
0.025
(0.004)
0.428
(0.052)
248
24.0
0.26
0.357
(0.076)
0.277
(0.047)
0.275
(0.130)
0.252
(0.046)
0.079
(0.086)
0.023
(0.004)
0.272
(0.048)
248
2.5
0.08
Table 10
Estimation results for the monopolistically competitive model (10) when multinationals with manufacturing facilities in Canada being treated as foreign rms
Dependent variable
Tariffs
SH
i
H
IH
i Si
IPi SPi
IROW
(SROW
1)
i
i
NTB
Protection share
(1)
(2)
(3)
(1)
(2)
(3)
(1)
(2)
(3)
0.079
(0.093)
0.481
(0.059)
0.112
(0.150)
0.093
(0.050)
0.198
(0.085)
0.598
(0.072)
0.219
(0.165)
0.200
(0.063)
0.267
(0.088)
0.467
(0.078)
0.393
(0.176)
0.169
(0.073)
0.912
(0.641)
2.352
(0.403)
2.619
(1.030)
0.080
(0.343)
1.079
(0.564)
3.618
(0.475)
3.143
(1.096)
1.043
(0.421)
1.202
(0.555)
3.965
(0.491)
3.468
(1.101)
0.614
(0.460)
1.183
(0.858)
2.901
(0.540)
3.903
(1.377)
1.822
(0.459)
1.899
(0.791)
3.427
(0.666)
5.807
(1.537)
2.452
(0.590)
2.037
(0.792)
3.178
(0.701)
5.865
(1.573)
2.363
(0.657)
1.57
(0.317)
0.57
(0.252)
0.84
(0.412)
0.36
(0.176)
248
82.0
0.70
0.04
(0.315)
0.39
(0.350)
1.11
(0.530)
0.03
(0.149)
248
552.3
4.49
0.02
(0.181)
0.30
(0.193)
0.87
(0.348)
0.29
(0.119)
248
539.5
4.39
0.05
(0.162)
0.30
(0.171)
0.87
(0.306)
0.15
(0.120)
248
537.4
4.37
0.06
(0.349)
0.41
(0.381)
1.34
(0.600)
0.63
(0.200)
248
624.5
5.08
0.26
(0.283)
0.55
(0.310)
1.69
(0.615)
0.72
(0.211)
248
623.4
5.07
0.33
(0.307)
0.64
(0.340)
1.85
(0.664)
0.74
(0.279)
248
625.8
5.09
a
b
c
N
Log-Likelihood
AIC
1.91
(0.264)
0.16
(0.234)
0.23
(0.326)
0.19
(0.108)
248
74.0
0.64
1.34
(0.205)
0.33
(0.178)
0.37
(0.291)
0.33
(0.110)
248
70.1
0.61
and substitution elasticities, one can back up the welfare maximizing

level of protection and the average effect of each lobby group on
Canadian trade policy. Table 7 shows the fraction of Canada's average
tariff and NTB that is explained by domestic and foreign lobbying.22 As
a result, the average Canadian industry receives 1.33% import tariffs,
7.31% NTB coverage and 7.81% protection share from lobbying by
domestic rms; 0.21% tariffs, 1.87% NTBs and 4.26% protection share
from lobbying by partner country rms 0.48% tariffs, 1.38% NTBs
and 6.24% protection share from lobbying by ROW rms. These
results are economically reasonable and statistically signicant.
22
i.e. by calculating a simple average of the tted values of the dependent variable
implied by the model estimates. Therefore, by construction, the contribution of each
lobby group to the average import tariff and NTB goes down to zero as the threshold for
the number of lobbyists in the denition of political organization dummies goes up.
5.3. Robustness tests

Up to now, we tested structural relationship between trade policy
outcomes and lobbying activity by domestic and foreign interest
groups. However, the main message of the previous section still
holds in a more general setup. Table 8 presents extended regressions
that include other explanatory variables of trade policy predicted by
earlier literature. We expect that more concentrated industries are
more easily get organized and are more effective in lobbying for
protections labor-intensive industries receive more protection from
the government because in a capital-abundant country these are
more likely to be import-competing industries; and industries with
greater numbers of unskilled low-paid workers are more protected
by the government for social justice reasons. Table 8 indicates that
all additional variables have expected signs and mostly signicant.
48
Table 11
Jtest for the benchmark and monopolistically competitive GH models
P-value
H0
H1
Dependent variable: tariffs

MC GH with foreign lobby is true
Benchmark GH is true
MC GH w/o foreign lobby is true
0.50
0.25
0.42
0.37
0.55
0.26
0.45
0.34
0.59
0.11
0.43
0.19
Dependent variable: NTBs

0.70
0.22
0.79
0.49
0.43
0.07
0.47
0.15
0.52
0.04
0.61
0.52
Dependent variable: Protection share

MC GH with foreign lobby is true Benchmark GH is true
MC GH w/o foreign lobby is true Benchmark GH is true
0.01
0.18
0.01
0.12
0.15
0.18
0.21
0.30
0.00
0.00
0.00
0.17
Notes: P-values denote the condence level for rejecting H0. MC stays for Monopolistic
competition version of GH model. In columns (1) and (2) an industry is politically
organized if it is represented by 1 and 3 lobbyists, respectively. In column (3) an
industry is politically organized if it is represented by at least 3 lobbyists and accounts
for strictly more than one third of the total number of lobbyists in that industry.
But more importantly, all coefcients of the central concerns, 2, 3

and 4, preserve their signs and signicance. Table 9 reports results
for specication (11) with additional control variables and without
adjustment of the dependent variable by elasticity terms. Again, US
lobbying activity in Canada is always found to lead to more
protection, while ROW lobbying is associated with lower levels of
protection.
To examine the robustness of the results with respect to the
denition of a foreign lobbyist, Eq. (10) was estimated using the data
in which nationality of a lobbyist was determined on the basis of the
location of its client's headquarter rather than manufacturing
facilities. Since many US multinationals lobbying in Canada operate
local afliates, this data transformation affects primarily the number
of US lobbyists raising it to 1.31 per industry. The results are reported
in Table 10. Once again, they indicate positive and signicant effect of
the US lobbying on the level of trade protection in Canada, which is
not surprising given common lobbying interests of Canadian and US
multinational rms. On the other hand, the effect of the ROW lobbying
for tariffs gets weaker, which may reect conicting interest of foreign
importers and multinationals serving Canadian market through their
local subsidiaries.
5.4. The comparison of the benchmark with monopolistic competition GH
models
This paper is the rst one that estimates empirically the GH model
with monopolistically competitive market structure. To test this
version of the model versus the benchmark model with perfect competition, I used a J-test for non-nested hypothesis testing (Davidson
and MacKinnon, 1993, p. 388). The testing procedure requires the
same dependent variable, so for the purpose of this section both
sides of Eq. (11) were multiplied by 1i , and 1 was moved to the righti
i
hand side. The alternative benchmark specication (13) remains
unchanged.
As in Davidson and MacKinnon (1993), let f(sji, Iji, i) be a LIML
regression model for the monopolistic competition specication (11),
and let g (shi , Ihi ) be a LIML regression model for the benchmark
specication (13). The validity of the benchmark GH model can be
tested using an augmented LIML regression g = g(shi , Ihi ) + 1f where f
is constructed from tted values of the LIML estimation of Eq. (11). The
benchmark GH model is rejected in favor of the monopolistic

competition model if the test for 1 = 0 is rejected. In a similar way, the
monopolistic competition model is rejected in favor of the benchmark
GH if in the regression model f =f(si, Iji, i) + 2 the hypothesis 2 = 0 is
rejected.
The J-test results for three measures of protection are presented in
Table 11. For each measure of protection the rst two rows of each
panel of Table 11 compare the benchmark versus the full monopolistic
competition model with three lobby groups. However, the original GH
model does not allow to analyze the behavior of foreign lobbies and
the last two rows of each panel compare GH versus monopolistic
competition model without foreign lobbying to isolate the effect of
imperfectly competitive market structure on explanatory power of
protection for sale model. The results of Table 11 suggest that
neither model can be rejected as a correct one when protection is
measured with tariffs. At the same time, the benchmark GH model is
always weakly rejected in favor of the model with monopolistic
competition as the monopolistically competitive specication of the
model adds more explanatory power. The second part of each section
of the table displays J-test results for the benchmark model and
monopolistic competition with only domestic lobbying, using the
same set of instruments. Again, neither model can be rejected, but
these results suggest that simply taking into account the imperfectly
competitive structure of the market improves the explanatory power
of the Protection for sale model.
When protection is measured with NTBs, J-test results indicate
that the benchmark model is rejected in favor of the monopolistic
competition model with foreign lobbies and weakly rejected in favor
of the model without foreign lobbies, while the monopolistic
competition version is never rejected. This implies that the monopolistically competitive model developed in this paper captures more
information than the model with perfect competition and better
explains cross-industry patterns of protection.
6. Conclusion
The main objective of this paper is to study the effect of political
economy factors on trade policy of an FTA in the presence of foreign
lobbying. This paper accomplishes this goal by modifying the original
GH model through the introduction of a monopolistically competitive
market structure to allow for the presence of two types of foreign
lobbies: lobbies from the FTA partner country and from outside of the
agreement. The paper shows that signing a free trade agreement with
a politically active partner country leads to a welfare-reducing
increase in import tariffs in the presence of foreign lobbying.
The empirical results suggest that foreign lobbying has a
signicant and differentiated effect on Canadian trade policy as a
result of Canada's membership in NAFTA. This is the rst paper that
analyzes differentiation of foreign lobbying objectives, that follows
from the presence of the FTA, and I show empirically that this
differentiation does matter for Canadian trade policy. I quantify
domestic and foreign post-NAFTA lobbying activity in Canada and
show that US rms successfully lobby the Canadian government for
increases in trade barriers, while foreign rms from outside of NAFTA
effectively lobby in Canada for trade barrier reductions. This implies
that active lobbying by an FTA partner country is an additional
political economy factor that was not considered in previous
research and that may lead to more protectionist trade policies of
regional trading blocks and impede multilateral trade liberalization.
Moreover, in the environment where almost every country in the
world is a member of at least one regional trade agreement, for a
complete understanding of a country's trade policy we should not
only consider the effect of foreign lobbying but also take into account
its differentiated effect. The empirical results also reveal that the GH
model with monopolistic competition has more explanatory power
than its original version.
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Journal of International Economics 77 (2009) 3749

Contents lists available at ScienceDirect

Journal of International Economics

Trade policy of a free trade agreement in the presence of foreign lobbying

I am grateful to my advisors Werner Antweiler, Matilde Bombardini and Brian

A. Stoyanov / Journal of International Economics 77 (2009) 3749

towards rms from a partner country. The model in this paper,

A. Stoyanov / Journal of International Economics 77 (2009) 3749

headquarters, if there is one. An amendment to the LRA, introduced in

that allow for the presence of foreign lobbying and facilitate

Xi = nHi dHi i xHi

+ nPi dPi i xPi

where Xi is an aggregate consumption index for product i, i is the

A. Stoyanov / Journal of International Economics 77 (2009) 3749

from country j as ji, we can write the prot of a country j rm that

where is the quantity supplied and is the marginal costs. I assume

The government chooses import tariffs to maximize a weighted

country j is politically organized and zero otherwise. The joint welfare

X = IiH WiH + aW + b IiP WiP + c IiROW WiROW

where sji = Pi i Xi i i denotes the share of country j rms on the Canadian

A. Stoyanov / Journal of International Economics 77 (2009) 3749

The fth term reects the effect of political activity by partner

A. Stoyanov / Journal of International Economics 77 (2009) 3749

Average number of lobbyists per sector

result, each lobbyist is matched to at least one industry, and for

A. Stoyanov / Journal of International Economics 77 (2009) 3749

imported goods within Canada. Formally, these rms should be

Elasticity of import demand

advantage independent of the level of protection. Following this

A. Stoyanov / Journal of International Economics 77 (2009) 3749

Following Grossman and Helpman (1994), the optimal import tariff

previous estimates of by Goldberg and Maggi (1999) and Gawande and

A. Stoyanov / Journal of International Economics 77 (2009) 3749

substitutes and markets are imperfectly competitive. The positive

or foreign industry changed its status from unorganized to organized.

Protection share (77.53)

Protection share (77.53)

A. Stoyanov / Journal of International Economics 77 (2009) 3749

for tariff using WTO mechanisms. According to these results, the

Canada, or high interest and ownership interconnections amongst

A. Stoyanov / Journal of International Economics 77 (2009) 3749

and substitution elasticities, one can back up the welfare maximizing

5.3. Robustness tests

A. Stoyanov / Journal of International Economics 77 (2009) 3749

Dependent variable: tariffs

Dependent variable: NTBs

Dependent variable: Protection share

But more importantly, all coefcients of the central concerns, 2, 3

benchmark GH model is rejected in favor of the monopolistic

A. Stoyanov / Journal of International Economics 77 (2009) 3749

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