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Mercosur appears as an interesting case study for analyzing the determinants of exceptions in regional trade agreements. Its member countries—Argentina, Brazil, Paraguay, and Uruguay—intended to make Mercosur a full customs union by January 1995. This goal turned out to be too ambitious, and the Protocol of Ouro Preto and other agreements signed in December 1994 led to a hybrid solution. Overall, out of a total of 9,119 tariff lines, around 30 percent are subject, in at least one member country, to either external deviations from the common external tariff or internal deviations from free trade. Thus an important set of holes remains under the existing agreement, leading some authors to consider Mercosur an incomplete customs union.

This article compares the results of the theoretical literature on endogenous tariff formation with evidence from Mercosur. The results show that Mercosur's common …