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Why is there an Anti-trade Bias in Trade Policy?

  • Nuno Limão

    (University of Maryland)

  • Arvind Panagariya

    (University of Maryland)

Small economies rarely embrace free trade, a fact that is commonly explained as a consequence of the government's use of trade policy to redistribute income. But why is this redistribution typically biased in favor of import-competing sectors and is consequently trade restricting rather than trade promoting? This remains an important puzzle in trade policy. Most models assume the puzzle away by restricting the government set of policies or else generate the opposite, and empirically counterfactual, prediction--that trade policy has a pro-trade bias (e.g. Grossman-Helpman AER 1994). We show that if the government's objective reflects a concern for inequality, or diminishing marginal political support from factor owners, then trade policy exhibits anti-trade bias. Importantly the mechanism that we analyze generates the anti-trade bias independently of whether factors are specific or mobile across sectors. The mechanism also generates an anti-trade bias between large countries even after they sign reciprocal trade agreements that eliminate any terms-of-trade motivation for the use of trade protection.

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Paper provided by EconWPA in its series International Trade with number 0310003.

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Length: 41 pages
Date of creation: 09 Oct 2003
Date of revision:
Handle: RePEc:wpa:wuwpit:0310003
Note: Type of Document - pdf; prepared on win2000; pages: 41
Contact details of provider: Web page: http://econwpa.repec.org

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