EXPORT DRAWBACK AND THE STRUCTURE OF PROTECTION

Despite the importance of export drawback as a trade policy, no systematic analysis has attempted to identify the conditions under which domestic component producers will maintain or lose the protection provided by the uniform component tariff. An attempt is made to derive the necessary and sufficient conditions that must exist for domestic component producers under drawback to retain this protection. It is shown that the choice confronting policymakers is not between export expansion and home component production but is a choice of which group -- component producers (through reduced protection) or final good consumers (through higher final good prices) -- will incur the costs of the export expansion induced by drawback. It is also demonstrated that 2-way trade, the simultaneous import and export of the identical final good, may emerge under drawback. These effects of drawback had previously been unrecognized.