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

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  • Sweder van Wijnbergen

Abstract

Using a standard complete specialization model of a small open economy within a rigorous intertemporal optimization framework with contract- based wage rigidity, we show that permanent tariffs may lead to a current account deterioration and a fall in employment, contradicting most of the literature of macro-economic effects of import tariffs. I show that this will always be the case if the economy is small enough. 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

  • Sweder van Wijnbergen, 1987. "Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism," NBER Working Papers 2261, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2261
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    References listed on IDEAS

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    1. Mussa, Michael, 1974. "Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability, and Intensity in the Short and Long Run," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1191-1203, Nov.-Dec..
    2. Russell S. Boyer, 1977. "Commercial Policy under Alternative Exchange Rate Regimes," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 218-232, May.
    3. Lloyd A. Metzler, 1949. "Tariffs, the Terms of Trade, and the Distribution of National Income," Journal of Political Economy, University of Chicago Press, vol. 57, pages 1-1.
    4. Mussa, Michael, 1974. "A Monetary Approach to Balance-of-Payments Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(3), pages 333-351, August.
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    Cited by:

    1. Yoshiyasu Ono, 2010. "Trade Policy, Exchange Rate Adjustment and Unemployment," Chapters,in: Globalization and Economic Integration, chapter 7 Edward Elgar Publishing.
    2. 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.
    3. Yoshiyasu Ono, 2006. "Protective Trade Policies 'Reduce' Employment: A Dynamic Optimization Approach," ISER Discussion Paper 0659, Institute of Social and Economic Research, Osaka University.
    4. 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, January.
    5. 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.
    6. 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.
    7. 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.

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