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Look before you leap: Why politicians may have a point to be hesitant about the gains from trade

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  • Gundlach, Erich
  • de Vaal, Albert

Abstract

Economists emphasize the welfare gains of unrestricted trade, but politicians worry about the income distribution effects of increased competition. We show that the welfare gains of a trade shock become ambiguous if inaccurate information hinders optimal income redistribution with distortionary policy instruments. To be sure about the net welfare outcome of a compensated trade shock, the government must know the size of the trade shock and the corresponding size of the policy instrument that is needed to generate a balanced budget. If this is not the case, politicians may have a point when being hesitant about the gains from trade.

Suggested Citation

  • Gundlach, Erich & de Vaal, Albert, 2014. "Look before you leap: Why politicians may have a point to be hesitant about the gains from trade," Economic Systems, Elsevier, vol. 38(1), pages 89-99.
    • Handle: RePEc:eee:ecosys:v:38:y:2014:i:1:p:89-99
    DOI: 10.1016/j.ecosys.2013.07.009
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    References listed on IDEAS

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    1. D. Acemoglu & J. Robinson, 2013. "Economics versus politics: pitfalls of policy advice," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 12.
    2. Corden, W. Max., 1997. "Trade Policy and Economic Welfare," OUP Catalogue, Oxford University Press, edition 2, number 9780198775348, Decembrie.
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    More about this item

    Keywords

    Trade policy; Income distribution; Compensation schemes;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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