Working Paper: NBER ID: w12164
Authors: Nathan Nunn; Daniel Trefler
Abstract: It has long been recognized that a country's tariffs are the endogenous outcome of a rent-seeking game whose equilibrium reflects national institutions. Thus, the structure of tariffs across industries provides insights into how institutions, as reflected in tariff policies, affect long-term growth. We start with the commonplace perception among politicians that protection of skill-intensive industries generates a growth-enhancing externality. Modifying the Grossman-Helpman protection for sale model to allow for this, we make two predictions. First, a country with good institutions will tolerate high average tariffs provided tariffs are biased towards skill-intensive industries. Second, there need not be any relationship between average tariffs and good institutions. Using data for 17 manufacturing industries in 59 countries over approximately 25 years, we find that average tariffs are uncorrelated with output growth and that the skill-bias of tariff structure is positively correlated with output growth. We interpret this to mean that countries grow faster if they are able and willing to put a lid on the rent-seeking behaviour of special interest lobby groups. \nWe show that our results are not compatible with explanations that appeal to (1) externalities per se, (2) initial industrial structure that is skewed towards skill-intensive industries, or (3) the effects of broader institutions such as rule of law and control of corruption.
Keywords: Tariffs; Economic Growth; Lobbying; Institutions
JEL Codes: F10; F14; O24; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutional quality (I24) | Skill-bias of tariffs (F16) |
| Skill-bias of tariffs (F16) | Economic growth (O49) |
| Institutional quality (I24) | Economic growth (O49) |
| Average tariffs (F19) | Economic growth (O00) |
| Institutional quality (I24) | Rent-seeking behavior (D72) |
| Rent-seeking behavior (D72) | Economic growth (O00) |