Working Paper: NBER ID: w3269
Authors: Raquel Fernandez; Dani Rodrik
Abstract: Despite the well-known gains from trade, trade liberalization is politically one of the most contentious actions that a government can take. We propose and formalize a new argument, having to do with uncertainty, which is complementary to the usual explanations for why that is the case; many individuals will simply not know how they will fare under trade reform, and this can reduce support for a reform which would have been otherwise popular, even in the absence of risk aversion. We show that reforms that would have received adequate popular support ex post (i.e., which 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, since reforms that 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 argument.
Keywords: trade reform; status quo bias; uncertainty
JEL Codes: F13; F53
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) |
| initial rejection of reforms (P39) | continued rejection of reforms (D72) |
| initial acceptance of reforms (P26) | potential reversal of reforms (E69) |
| uncertainty (D89) | future outcomes of trade reforms (F17) |