Working Paper: NBER ID: w0797
Authors: Jonathan Eaton; Gene M. Grossman
Abstract: Free trade is not optimal for a small country that faces uncertain terms of trade if some factors are immobile - ex post, and markets for contingent claims are incomplete. The government can improve social welfare by using commercial policy that serves as a partial substitute for missing insurance markets. Using a combination of analytical and simulation techniques we demonstrate that optimal policy for this purpose will often have an anti-trade bias. We also show that the usual preference by economists for factor or product taxes and subsidies over tariffs and export subsidies may not be justified in this context.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| commercial policy interventions (F68) | social welfare outcomes (I38) |
| tariffs (F13) | social welfare outcomes (I38) |
| tariffs (F13) | labor shift from export sectors to import-competing sectors (F16) |
| labor shift from export sectors to import-competing sectors (F16) | social welfare outcomes (I38) |
| interventionist commercial policy (F13) | social welfare (I38) |
| optimal policy (C61) | anti-trade bias (F14) |