We study the dynamics of optimal trade policy in a model with costly inter-sectoral adjustment of labour, where migrants pay less than the marginal social cost of migration. If workers have rational expectations, a future tariff has an announcement effect on the current migration decision. If the government is able to commit itself to future policy, the optimal trajectory involves phasing in and then phasing out protection of the dying sector. This contrasts with recommendations of gradual liberalization. Without the ability to make commitments, the equilibrium policy begins with and maintains free trade.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
856.
Find related papers by JEL classification: F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
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