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Endogenous Protection in General Equilibrium: estimating political weights in the EU

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Abstract

We examine the political economy underpinnings of import protection in general equilibrium. Starting from a dual theoretical representation of production, trade, and consumption, we map a general representation of the real economy to underlying political processes aka the political support function to derive a general representation of the determinants of import protection. This includes the relatively standard approach of examining the pattern of tariffs in a Grossman-Helpman framework, as well as recent extensions linked to upstream and downstream linkages between sectors. Because we start from a relatively generic general equilibrium model of production, we have an immediate bridge between the theory and general equilibrium-based estimates of the welfare effects and rents generated by tariffs. We therefore follow the development of our generalized theoretical framework by introducing the use of general equilibrium estimates of the direct and indirect marginal impacts of protection at the sector level for econometric estimation of the revealed pattern of policy weights. This GE approach yields direct estimates of political weights based on economic effects, including cross-industry effects. The resulting weights lend insight into relative protection of agriculture and manufacturing. Working with data on the European union, we find that the strength of downstream linkages matters for policy weights and rates of protection, as does the national posture of industry. We also find support for a general political support function in the determination of tariffs, though results are mixed for the more narrow Grossman-Helpman specification. In the EU, nationality of industry seems to play a role in the setting of Community-wide import protection.

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Bibliographic Info

Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2008-15.

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Length: 23 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:jku:econwp:2008_15

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Keywords: political weights; political economy of import protection; Grossman-Helpman model;

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  1. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  2. Grossman, Gene & Helpman, Elhanan, 1994. "The Politics of Free Trade Agreements," CEPR Discussion Papers 908, C.E.P.R. Discussion Papers.
  3. Devashish Mitra & Dimitrios D. Thomakos & Mehmet A. Ulubasoblu, 2004. "Protection versus Promotion: An Empirical Investigation," Economics and Politics, Wiley Blackwell, vol. 16(2), pages 147-162, 07.
  4. Giovanni Maggi & Pinelopi Koujianou Goldberg, 1999. "Protection for Sale: An Empirical Investigation," American Economic Review, American Economic Association, vol. 89(5), pages 1135-1155, December.
  5. Olivier Cadot & Jaime de Melo & Marcelo Olarreaga, 2004. "Lobbying, Counterlobbying, and the Structure of Tariff Protection in Poor and Rich Countries," World Bank Economic Review, World Bank Group, vol. 18(3), pages 345-366.
  6. Trefler, Daniel, 1993. "Trade Liberalization and the Theory of Endogenous Protection: An Econometric Study of U.S. Import Policy," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 138-60, February.
  7. Kishore Gawande & Usree Bandyopadhyay, 2000. "Is Protection for Sale? Evidence on the Grossman-Helpman Theory of Endogenous Protection," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 139-152, February.
  8. Gardner, Bruce L, 1987. "Causes of U.S. Farm Commodity Programs," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 290-310, April.
  9. Constantopoulos, Maria, 1974. "Labour protection in Western Europe," European Economic Review, Elsevier, vol. 5(4), pages 313-328, December.
  10. Rod Tyers, 2004. "Implicit Policy Preferences and Trade Reform by Tariff Aggregates," ANU Working Papers in Economics and Econometrics 2004-445, Australian National University, College of Business and Economics, School of Economics.
  11. Anderson, Kym, 1980. "The Political Market for Government Assistance to Australian Manufacturing Industries," The Economic Record, The Economic Society of Australia, vol. 56(153), pages 132-44, June.
  12. Jong-Wha Lee & Phillip Swagel, 2000. "Trade Barriers And Trade Flows Across Countries And Industries," The Review of Economics and Statistics, MIT Press, vol. 79(3), pages 372-382, August.
  13. kishore gawande & pravin krishna, 2005. "The Political Economy of Trade Policy: Empirical Approaches," International Trade 0503003, EconWPA.
  14. Antoine Bouët & Yvan Decreux & Lionel Fontagné & Sébastien Jean & David Laborde, 2004. "A Consistent, Ad-Valorem Equivalent Measure of Applied Protection Across the World: The MAcMap-HS6 Database," Working Papers 2004-22, CEPII research center.
  15. Finger, J M & Hall, H Keith & Nelson, Douglas R, 1982. "The Political Economy of Administered Protection," American Economic Review, American Economic Association, vol. 72(3), pages 452-66, June.
  16. Patrick A. Messerlin, 2001. "Measuring the Costs of Protection in Europe: European Commercial Policy in the 2000s," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 102.
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Cited by:
  1. Henning, Christian H.C.A. & Struve, Carsten & Brockmeier, Martina, 2008. "The logic of the CAP: Politics or Economics?," Agricultural Distortions Working Paper 48639, World Bank.
  2. Bullock, David S., 2012. "Dangers of Using Political Preference Functions in Political Economy Analysis: Examples from U.S. Ethanol Policy," Congress Papers 124118, Italian Association of Agricultural and Applied Economics (AIEAA).

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