Can bilateralism ease the pains of multilateral trade liberalization?

Using the influence-driven approach to endogenous trade-policy determinatio n, we show how a free-trade agreement (FTA) with rules of origin can work a s a device to compensate losers from trade liberalization. The FTA construc ted in this paper is characterized by external tariff structures that are n egatively correlated across member countries, ensuring efficiency gains and , through reduced average protection, compatibility with the multilateral t rading system's requirements. It is also politically viable, and we demonst rate that, in the countries concerned, governments are willing to include i ts formation in the political agenda in spite of the fact that, in equilibr ium, political contributions from producer lobbies decline after the agreem ent. (C) 2001 Elsevier Science B.V. All rights reserved. JEL classification : F11; F13; F15.