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Why Free Trade May Hurt Developing Countries

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  • Michael, Michael S

Abstract

This paper builds a general equilibrium trade model where a country produces two traded goods and one nontraded public consumption good. The government finances the provision of the public good by taxing the incomes of factors of production, and/or by imposing tariffs. Within this framework, the paper (i) shows that a small tariff or an income tax improves the country's welfare if there is an undersupply of public good, and (ii) identifies the circumstances in which an improvement in the country's terms of trade may reduce its welfare, and free trade can be inferior to autarky. A terms of trade improvement, or the movement from autarky to free trade, definitely improves the country's welfare if the government imposes a tariff that leaves the domestic relative price of the imported good unchanged. Copyright 1997 by Blackwell Publishing Ltd.

Suggested Citation

  • Michael, Michael S, 1997. "Why Free Trade May Hurt Developing Countries," Review of International Economics, Wiley Blackwell, vol. 5(2), pages 179-187, May.
    • Handle: RePEc:bla:reviec:v:5:y:1997:i:2:p:179-87
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    Cited by:

    1. Sung-Ko Li & Chun-Kei Tsang, 2018. "The Impacts Of Biased Resource Allocation On The Effectiveness Of Official Development Assistance," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(01), pages 239-256, July.

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