Trade Liberalization versus Protectionism: Dynamic Welfare Asymmetries

B. Ravikumar, Ana Maria Santacreu and Michael Sposi
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B. Ravikumar: http://research.stlouisfed.org/econ/ravikumar/
Michael Sposi: https://people.smu.edu/msposi/

No 2023-019, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We investigate whether the losses from an increase in trade costs (protectionism) are equal to the gains from a symmetric decrease in trade costs (liberalization). We incorporate dynamics through capital accumulation into a standard Armington trade model and show that the welfare changes are asymmetric: Losses from protectionism are smaller than the gains from liberalization. In contrast, standard static trade models imply that the losses equal the gains. The intuition for asymmetry in our model is that, following protectionism, the economy can coast off of previously accumulated capital stock, so higher trade costs do not imply large losses immediately. We develop an accounting device to decompose the source of welfare asymmetries into three time-varying contributions: share of income allocated to consumption, measured productivity, and capital stock. Asymmetry in capital accumulation is the largest contributing factor, and measured productivity is the smallest.

Keywords: dynamic gains; asymmetry; capital; protectionism; liberalization (search for similar items in EconPapers)
JEL-codes: E22 F11 F13 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2023-08-20
New Economics Papers: this item is included in nep-dge and nep-int
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:96591

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DOI: 10.20955/wp.2023.019

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