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Look before you leap: the economics of free trade and income redistribution

Author

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  • Gundlach, Erich
  • de Vaal, Albert

Abstract

Economists tend to exalt the virtues of free international trade, while politicians are more skeptical. This paper suggests that this is the case because politicians mainly worry about the income distribution effects of trade liberalization, while economists focus on efficiency. Using textbook economic analyses we show that compensating the income distribution effects of free trade may be more complicated and hazardous than is often assumed, at least from a comparative static point of view. Hence politicians may favor trade liberalization only when distributional effects are ignored. By using a multitude of analytical tools and approaches, our paper also makes a useful teaching case for undergraduate students to test and gear their thinking about trade policy issues.

Suggested Citation

  • Gundlach, Erich & de Vaal, Albert, 2010. "Look before you leap: the economics of free trade and income redistribution," Kiel Working Papers 1583, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwkwp:1583
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    References listed on IDEAS

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    1. Hunter, Linda, 1991. "The contribution of nonhomothetic preferences to trade," Journal of International Economics, Elsevier, vol. 30(3-4), pages 345-358, May.
    2. Christopher S. P. Magee & Stephen P. Magee, 2008. "The United States is a Small Country in World Trade," Review of International Economics, Wiley Blackwell, vol. 16(5), pages 990-1004, November.
    3. Peter K. Schott, 2001. "Do Rich and Poor Countries Specialize in a Different Mix of Goods? Evidence from Product-Level US Trade Data," NBER Working Papers 8492, National Bureau of Economic Research, Inc.
    4. Reint Gropp & Liam P. Ebrill & Janet Gale Stotsky, 1999. "Revenue Implications of Trade Liberalization," IMF Occasional Papers 180, International Monetary Fund.
    5. Henry Wan Jr, 1997. "A Note on Compensation Schemes," The Japanese Economic Review, Japanese Economic Association, vol. 48(2), pages 147-155, June.
    6. Dixit, Avinash & Norman, Victor, 1986. "Gains from trade without lump-sum compensation," Journal of International Economics, Elsevier, vol. 21(1-2), pages 111-122, August.
    7. Christian Broda & Nuno Limao & David E. Weinstein, 2008. "Optimal Tariffs and Market Power: The Evidence," American Economic Review, American Economic Association, vol. 98(5), pages 2032-2065, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Trade policy; income distribution; compensation schemes; undergraduate teaching;

    JEL classification:

    • A20 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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