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Trade preferences and political equilibrium associated with trade liberalization

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  • Shoya Ishimaru
  • Soo Hyun Oh
  • Seung-Gyu Sim

Abstract

This paper, motivated by the so-called North–South problem in trade, analyzes ex ante trade preferences and the source of potential political conflicts regarding trade liberalization. Developing a dynamic extension of the traditional Heckscher–Ohlin model with imperfect labor mobility and tracking overall dynamic paths from the autarky to free-trade steady states, we demonstrate that in the presence of inter-sectoral migration barrier, bilateral free-trade agreements can be welcomed (opposed) by the majority of workers in a capital-abundant (labor-abundant) country, which is inconsistent with the welfare prediction by Stolper and Samuelson. This paper also proposes a numerical algorithm to solve for the entire transition path of the model under rational expectation. Our simulation experiments further reveal that preannounced and delayed implementation can facilitate a bilateral free-trade agreement by partially neutralizing short-run transitional gains and losses so as to persuade the losers to support the reform without affecting the beneficiaries’ trade preferences.

Suggested Citation

  • Shoya Ishimaru & Soo Hyun Oh & Seung-Gyu Sim, 2017. "Trade preferences and political equilibrium associated with trade liberalization," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 26(3), pages 361-384, April.
    • Handle: RePEc:taf:jitecd:v:26:y:2017:i:3:p:361-384
    DOI: 10.1080/09638199.2016.1252417
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