Special Interest Groups and the Australia-United States Free Trade Agreement

Abstract

In the political economy model of Grossman and Helpman (1995), two incumbent governments attempt to negotiate a free trade agreement (FTA), while special interest groups in each country influence negotiations by offering financial contributions to their governments. As a consequence, a set of politically sensitive industries is excluded from the proposed FTA. Using the empirical methodology of Gawande, Sanguinetti, and Bohara (2001), this paper shows that the Grossman-Helpman (1995) model successfully predicts the set of excluded industries for the recently implemented Australia-United States FTA. It is also shown that the set of exclusions favours Australian interest groups, which could indicate that the gains from the FTA are lower for the government of Australia than for the government of the United States.