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Trade liberalisation with costly adjustment

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Author Info
Alvaro Forteza
Rossana Patrón

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Abstract

This paper discusses the welfare effects of trade in a Heckscher-Ohlin model of trade with costs of adjustment. The paper analyses the efficiency and the distributional effects of eliminating a tariff in a formerly protected sector. The tariff can be eliminated at the onset or after a while. In case of postponing the elimination of the tariff, the government may pre-announce the policy change or may not do it and surprise the private sector. It is shown that while large adjustment costs reduce the efficiency gains from trade liberalisation, small to moderate adjustment costs may raise the efficiency gains from a pre-announced liberalisation. The (net) adjustment costs reduce the welfare gains and losses of owners of production factors from a sudden unanticipated liberalisation. The policy risk is partially shifted towards owners of firms. The distributional effects of trade liberalisations are more complex when the policy is pre-announced. The adjustment costs may increase the gains and losses of owners of the production factors, for small and moderate levels. Also, the announcement that the tariff will be eliminated affects the value of the firms, and when the adjustment cost are not high it may raise rather than reduce the value of the firms in the formerly protected sector.

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Publisher Info
Paper provided by Department of Economics - dECON in its series Documentos de Trabajo (working papers) with number 0901.

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Length: 24 pages
Date of creation: Dec 2001
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Handle: RePEc:ude:wpaper:0901

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Find related papers by JEL classification:
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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  1. Sebastian Edwards, 1994. "Trade and Industrial Policy Reform in Latin America," NBER Working Papers 4772, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Dixit, Avinash, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-32, Winter. [Downloadable!] (restricted)
  3. Hamermesh, Daniel S, 1995. "Labour Demand and the," Economic Journal, Royal Economic Society, vol. 105(430), pages 620-34, May. [Downloadable!] (restricted)
  4. Falvey, Rod & Kim, Cha Dong, 1992. "Timing and Sequencing Issues in Trade Liberalisation," Economic Journal, Royal Economic Society, vol. 102(413), pages 908-24, July. [Downloadable!] (restricted)
  5. Rothschild, Michael, 1971. "On the Cost of Adjustment," The Quarterly Journal of Economics, MIT Press, vol. 85(4), pages 605-22, November. [Downloadable!] (restricted)
  6. Ramon L. Clarete & Irene Trela & John Whalley, 1994. "Evaluating Labour Adjustment Costs from Trade Shocks: Illustrations for the U.S. Economy Using an Applied General Equilibrium Model With Transactions," NBER Working Papers 4628, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Karp, Larry & Paul, Thierry, 1994. "Phasing In and Phasing Out Protectionism with Costly Adjustment of Labour," Economic Journal, Royal Economic Society, vol. 104(427), pages 1379-92, November. [Downloadable!] (restricted)
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  8. Rui Albuquerque & Sergio Rebelo, 1998. "On the Dynamics of Trade Reform," NBER Working Papers 6700, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Guillermo Calvo & Enrique G. Mendoza, 1994. "Trade Reforms of Uncertain Duration and Real Uncertainty - A First Approximation," IMF Working Papers 94/45, International Monetary Fund.
  10. Daron Acemoglu, 1999. "Patterns of Skill Premia," NBER Working Papers 7018, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Sargent, Thomas J, 1978. "Estimation of Dynamic Labor Demand Schedules under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1009-44, December. [Downloadable!] (restricted)
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  12. Daniel S. Hamermesh & Wolter H. J. Hassink & Jan C. van Ours, 1994. "New Facts About Factor-Demand Dynamics: Employment, Jobs, and Workers," NBER Working Papers 4625, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Leamer, Edward E., 1980. "Welfare computations and the optimal staging of tariff reductions in models with adjustment costs," Journal of International Economics, Elsevier, vol. 10(1), pages 21-36, February. [Downloadable!] (restricted)
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