Working Paper: NBER ID: w1458
Authors: Michael Mussa
Abstract: This paper examines the appropriate time path of the tariff rate for a small open economy that has decided to move from protection of import competing industries to free trade. Adjustment costs for moving resources to alternative uses do not provide a rationale for gradual adjustment of the tariff rate because in the absence of distortions, rational optimizing agents will make socially appropriate investment decisions with respect to adjustment when they are qiven correct price signals. Some distortions of the adjustment process imply the desirability of gradual adjustment of the tariff rate to slow adjustment, but other distortions imply the desirability of subsidizing imports in the short run in order to speed movement of resources out of previously protected industries. Concern with the income redistribution effects of reductions in the tariff rate(which usually injure owners of factors in previously protected industries) does provide a general rationale for a gradual move to free trade. The influence of the unemployment consequences of tariff reduction on the appropriate path of commercial policy depends on the nature and shape of the respone of the rate of resource reallocation to the level of unemployment in previously protected industries.
Keywords: trade liberalization; tariff policy; adjustment costs
JEL Codes: F13; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of distortions (H21) | immediate shift to free trade (F10) |
| immediate shift to free trade (F10) | efficient adjustment by rational agents (D00) |
| distortions (H31) | gradualism (O40) |
| static expectations (C62) | rapid adjustments (F32) |
| taxation (H20) | slow adjustments (F32) |
| income redistribution concerns (H23) | gradual approach to trade liberalization (F13) |
| initially reducing tariffs (F13) | facilitate faster adjustments (F32) |
| tariff reductions (F13) | impact on resource allocation (F69) |
| tariff reductions (F13) | impact on unemployment (F66) |