Macroeconomic Versus Market-Specific Protection: An Intertemporal Optimizing Model of North-South Trade

If the General Agreement on Trade and Tariffs reduces foreign trade barriers against U.S. farm exports, special interest groups in affected nations will seek other forms of protection. It would not be surprising if some of our trading partners used general macroeconomic policies to promote domestic production. This paper develops a model to demonstrate how the government of an importing nation might reasonably undertake macroeconomic policies designed to thwart imports. Using a two-country, overlapping generations model, the paper analyzes some of the tensions between developed and developing nations regarding intertemporal trade and capital movements. The model is designed so the optimizing agents in the South have a high rate of time preference. Otherwise, the North and the South are alike in all respects. The differential rate of time preference means that the South is likely to have a relatively low capital-to-labor ratio, wage rate, and level of per capita income but a relatively high interest rate in autarkic equilibrium. The introduction of international capital flows (intertemporal trade) will be welfare reducing for the current generation in the South, even though it may increase the next generation's (and steady-state) utility. The international conflicts that arise from international capital movements and the intergenerational conflicts that arise within each nation are discussed.