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Trade Liberalisation with Costly Adjustment

Author

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  • Alvaro Forteza
  • Rossana Patrón

Abstract

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.

Suggested Citation

  • Alvaro Forteza & Rossana Patrón, 2003. "Trade Liberalisation with Costly Adjustment," Journal of Applied Economics, Taylor & Francis Journals, vol. 6(1), pages 95-125, May.
    • Handle: RePEc:taf:recsxx:v:6:y:2003:i:1:p:95-125
    DOI: 10.1080/15140326.2003.12040587
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