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Trade Liberalisation with Costly Adjustment

The paper analyses the efficiency and the distributional effects of eliminating a tariff in a protected sector, in a Heckscher-Ohlin model of trade with costs of adjustment. The tariff can be eliminated at the onset or after a while. In case of postponing it 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 adjustment costs reduce the effects on factor returns from a sudden unanticipated liberalisation. The distributional effects of trade liberalisations are more complex when the policy is pre-announced. For small and moderate levels, the adjustment costs may increase the effects of the policy on factor returns. Also, the “value of the announcement” rises with the adjustment costs.

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Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): VI (2003)
Issue (Month): (May)
Pages: 95-125

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Handle: RePEc:cem:jaecon:v:6:y:2003:n:1:p:95-125
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  1. 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.
  2. Hamermesh, Daniel S, 1995. "Labour Demand and the," Economic Journal, Royal Economic Society, vol. 105(430), pages 620-34, May.
  3. Guillermo A. Calvo & Enrique G. Mendoza, 1994. "Trade Reforms of Uncertain Duration and Real Uncertainty: A First Approximation," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 555-586, December.
  4. 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.
  5. Thomas J. Sargent, 1978. "Estimation of dynamic labor demand schedules under rational expectations," Staff Report 27, Federal Reserve Bank of Minneapolis.
  6. Daron Acemoglu, 2003. "Patterns of Skill Premia," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 199-230.
  7. Edwards, Sebastian, 1988. "Terms of Trade, Tariffs, and Labor Market Adjustment in Developing Countries," World Bank Economic Review, World Bank Group, vol. 2(2), pages 165-85, May.
  8. Michael Rothschild, 1971. "On the Cost of Adjustment," The Quarterly Journal of Economics, Oxford University Press, vol. 85(4), pages 605-622.
  9. Rui Albuquerque & Sergio Rebelo, 1998. "On the Dynamics of Trade Reform," NBER Working Papers 6700, National Bureau of Economic Research, Inc.
  10. 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.
  11. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
  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.
  13. 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.
  14. Sebastian Edwards, 1994. "Trade and Industrial Policy Reform in Latin America," NBER Working Papers 4772, National Bureau of Economic Research, Inc.
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