Trade preferences and political equilibrium associated with trade liberalization

Shoya Ishimaru, Soo Hyun Oh and Seung-Gyu Sim

The Journal of International Trade & Economic Development, 2017, vol. 26, issue 3, 361-384

Abstract: This paper, motivated by the so-called North–South problem in trade, analyzes ex ante trade preferences and the source of potential political conflicts regarding trade liberalization. Developing a dynamic extension of the traditional Heckscher–Ohlin model with imperfect labor mobility and tracking overall dynamic paths from the autarky to free-trade steady states, we demonstrate that in the presence of inter-sectoral migration barrier, bilateral free-trade agreements can be welcomed (opposed) by the majority of workers in a capital-abundant (labor-abundant) country, which is inconsistent with the welfare prediction by Stolper and Samuelson. This paper also proposes a numerical algorithm to solve for the entire transition path of the model under rational expectation. Our simulation experiments further reveal that preannounced and delayed implementation can facilitate a bilateral free-trade agreement by partially neutralizing short-run transitional gains and losses so as to persuade the losers to support the reform without affecting the beneficiaries’ trade preferences.

Date: 2017
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DOI: 10.1080/09638199.2016.1252417

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