Trade Liberalization in General Equilibrium: Intertemporal and Inter-Industry Effects

Lawrence H. Goulder and Barry Eichengreen

No 2965, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper uses a dynamic computable general equilibrium model to simulate the effects of unilateral reductions by the U.S. in tariffs and "voluntary" export restraints (VER's). We consider 50 percent cuts in tariffs and in ad valorem VER equivalents, separately and in combination. The model features intertemporal optimization by households and firms, explicit adjustment dynamics, an integrated treatment of the current and capital accounts of the balance of payments, and industry disaggregation. Central findings include: (1) VER's are considerably more significant than tariffs in terms of the magnitude of the macroeconomic effects induced by their reduction; (2) while VER reductions enhance domestic welfare, unilateral tariff cuts reduce domestic welfare (as a consequence of U.S. monopsony power and associated adverse terms of trade effects); (3) international capital movements critically regulate the responses of the U.S. and foreign economies to these trade initiatives and produce significant differences between short and long-run effects; and (4) effects differ substantially across industries. Together, these findings indicate that simulation analyses that disregard international capital movements, adjustment dynamics, and industry differences may generate seriously misleading results.

Date: 1989-05
Note: ITI IFM
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Citations: View citations in EconPapers (5)

Published as Canadian Journal of Economics, June 1992

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Related works:
Journal Article: Trade Liberalization in General Equilibrium: Intertemporal and Inter-industry Effects (1992)
Working Paper: Trade Liberalization in General Equilibrium: Intertemporal and Inter-Industry Effects (1989)
Working Paper: Trade Liberalization in General Equilibrium: Intertemporal and Inter-Industry Effects (1989)
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