Protectionism and welfare
Ravikumar et al., in this paper, attempt to answer the question of whether the losses from protectionist policies are equal to the gains from liberalization policies. Towards this goal, they develop a neoclassical model of capital accumulation with trade. They impose two crucial assumptions: a) trade is balanced in every period, and b) the change in trade costs in the two steady states, the “observed” or open and the “autarky,” are symmetric. The second assumption allows the authors to study any asymmetries that emerge solely from transitional dynamics. They find that along the transition path from “observed” to “autarky”:
- In the long run, the investment rate is invariant to the trade regime so changes in consumption are identical to changes in income.
- The share of income allocated to consumption varies along the transition path.
- Asymmetry in capital accumulation accounts for the largest share of the asymmetry between dynamic gains and losses, followed by asymmetry in consumption rates.
- Overall, losses from protectionism are smaller than the gains from liberalization.
The intuition behind their result is that “following protectionism, the economy can coast off of previously accumulated capital stock, so higher trade costs do not imply large losses immediately.”
Trade Liberalization versus Protectionism: Dynamic Welfare Asymmetries
Authors: B. Ravikumar, Ana Maria Santacreu, Michael J. Sposi
From: Federal Reserve Bank of St. Louis, Southern Methodist University
