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Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism

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  • van Wijnbergen, Sweder

Abstract

Using a standard complete specialization model of a small open economy within a rigorous intertemporal optimization framework and with contract-based wage rigidity, we show that permanent tariffs lead to a current account deterioration and a fall in employment, contradicting most of the literature on macroeconomic effects of import tariffs. The crucial factor in this complete reversal of standard results is the impact of tariffs on domestic real product wages via wage indexation. Temporary tariffs will have less of a negative impact on the CA or potentially even a positive impact, because they increase the consumption rate of interest (the terms at which future consumption can be traded for current consumption) and so increase private savings. Extensions towards incorporating a more general production structure, investment and the use of tariff revenues to provide wage subsidies are presented.

Suggested Citation

  • van Wijnbergen, Sweder, 1984. "Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism," CEPR Discussion Papers 30, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:30
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    1. Do higher wages lead to more imports?
      by Bruno Duarte in EUnomics on 2018-09-24 22:12:17

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    2. Jeanne, Olivier & Son, Jeongwon, 2024. "To what extent are tariffs offset by exchange rates?," Journal of International Money and Finance, Elsevier, vol. 142(C).
    3. Yoshiyasu Ono, 2010. "Trade Policy, Exchange Rate Adjustment and Unemployment," Chapters, in: Noel Gaston & Ahmed M. Khalid (ed.), Globalization and Economic Integration, chapter 7, Edward Elgar Publishing.
    4. Constantinos Challoumis, 2020. "Analysis of the Theory of Cycle of Money," Acta Universitatis Bohemiae Meridionalis, University of South Bohemia in Ceske Budejovice, Faculty of Economics, vol. 23(2), pages 13-29.
    5. Chung-Fu Lai, 2016. "Tariff, Consumption Home Bias and Macroeconomic Dynamics," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(8), pages 425-444, August.
    6. de Boer, Jantke & Eichler, Stefan & Rövekamp, Ingmar, 2024. "Protectionism, bilateral integration, and the cross section of exchange rate returns in US presidential debates," Journal of International Money and Finance, Elsevier, vol. 147(C).
    7. Constantinos Challoumis, 2024. "The Index of the Cycle of Money: The Case of Switzerland," JRFM, MDPI, vol. 17(4), pages 1-24, March.
    8. Yoshiyasu Ono, 2006. "Protective Trade Policies 'Reduce' Employment: A Dynamic Optimization Approach," ISER Discussion Paper 0659, Institute of Social and Economic Research, The University of Osaka.
    9. Constantinos Challoumis, 2021. "Index of the Cycle of Money – the Case of Bulgaria," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 2, pages 225-234, July.
    10. Jacob Frenkel & Assaf Razin, 1996. "Fiscal Policies and Growth in the World Economy," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262561042, December.
    11. Shinsuke Ikeda, 2003. "Tariffs, Time Preference, and the Current Account under Weakly Nonseparable Preferences," Review of International Economics, Wiley Blackwell, vol. 11(1), pages 101-113, February.
    12. Ragnar Torvik, 1997. "Real exchange rate dynamics and trade liberalization: the case of multiple tariffs and unemployment," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 6(3), pages 329-344.
    13. Mansoorian, Arman & Mohsin, Mohammed, 2010. "On the employment, investment, and current account effects of trade liberalizations with durability in consumption," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 228-240, December.
    14. Wilko Bolt & Kostas Mavromatis & Sweder van Wijnbergen, "undated". "The Global Macroeconomics of a Trade War: The EAGLE model on the US-China trade conflict," Tinbergen Institute Discussion Papers 19-015/VIII, Tinbergen Institute.
    15. Challoumis Constantinos, 2020. "Index of the Cycle of Money - The Case of Latvia," Economics and Culture, Sciendo, vol. 17(2), pages 5-12, December.

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