Working Paper: CEPR ID: DP391
Authors: Raquel Fernandez; Dani Rodrik
Abstract: Despite the well known gains from trade, trade liberalization is one of the most politically contentious actions that a government can undertake. We propose and formalize a new explanation of this unpopularity. The explanation is based on uncertainty and is complementary to the usual explanations: many individuals will simply not know how they will fare under trade reform, and this can reduce support for a reform which would otherwise have been popular, even in the absence of risk aversion. We show that reforms that would have received adequate popular support ex post (i.e. that once enacted will last) may fail to carry the day ex ante because of uncertainty regarding the distribution of gains and losses. Moreover, the role of uncertainty in determining the outcomes is not symmetric, in that reforms which are initially rejected will continue to be so in the future while reforms that are initially accepted may find themselves reversed over time. We discuss empirical illustrations drawn from the experiences of South Korea, Chile and Turkey to provide support for the new explanation.
Keywords: trade liberalization; uncertainty; distribution of gains
JEL Codes: 420
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uncertainty regarding the distribution of gains and losses from trade reform (F12) | Reduced support for trade reforms (F13) |
| Reforms initially rejected (P39) | Likely to continue being rejected in the future (D81) |
| Reforms accepted (P41) | May face reversal (F31) |
| Uncertainty surrounding individual outcomes (D81) | Bias toward the status quo in public opinion on trade reforms (F13) |
| Individuals in the import-competing sector do not know their future identities as gainers or losers under reform (F69) | Lack of support for the reform (E69) |