Working Paper: NBER ID: w4620
Authors: Robert W. Staiger
Abstract: This paper proposes a theory of gradual trade liberalization. I consider countries that are limited to self-enforcing arrangements in their trade relations. I argue that enforcement problems associated with the maintenance of low cooperative tariffs are exacerbated by the presence of resources in the import-competing sector that are (or potentially could be) earning rents from their sector-specific skills. Intuitively, by being able to transform into rents a portion of what otherwise would be dead weight loss under a tariff hike, the presence of such resources makes deviation from a low cooperative tariff to a high tariff more desirable for the deviating country, and makes punishments under reciprocally high tariffs less painful. Hence, the presence of rent-collecting resources in an import-competing sector acts as a deterrent to trade liberalization. But if an initial 'round' of liberalization can induce at least a portion of these resources in the import-competing sector to relocate to the rest of the economy, and if by not using their sector-specific skills these resources stand to lose them, then the enforcement issues associated with their presence will also diminish over time, and further rounds of liberalization are made possible by the effects of the initial round. I formalize this gradual process of trade liberalization, and explore the consequences of a failed round of liberalization for the ability to maintain current levels of cooperation.
Keywords: Trade Liberalization; Trade Policy; International Cooperation
JEL Codes: F13; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| presence of sector-specific resources in the import-competing sector (L79) | higher likelihood of governments deviating from low cooperative tariffs to high tariffs (F13) |
| initial round of trade liberalization (F13) | induce a portion of sector-specific resources to relocate to other sectors (L52) |
| induce a portion of sector-specific resources to relocate to other sectors (L52) | enforcement problems associated with their presence will diminish over time (P37) |
| enforcement problems associated with their presence will diminish over time (P37) | facilitate further rounds of liberalization (F13) |
| loss of sector-specific skills among displaced workers (J68) | reduces the incentive for governments to revert to high tariffs (F13) |