Trade Liberalization Versus Protectionism: Are the Dynamic Welfare Implications Symmetric?

Michael Sposi and Ana Maria Santacreu

No 1617, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We quantify changes in welfare that result from alternative trade reforms in an economy with endogenous capital accumulation. The dynamic welfare gains associated with a particular reduction in trade frictions are larger than the dynamic welfare losses associated with returning to the initial level of the frictions. This ``asymmetry'' occurs in the short-run, yet, permanently affects welfare. Three channels contribute to the size of the asymmetry: (i) the rate of capital depreciation, (ii) the responses of measured TFP and the marginal efficiency of investment to the trade shock, and (iii) the optimal response of the investment rate. Absent transitional dynamics, the gains from a trade liberalization are equal to the losses from returning to the initial trade frictions. The short-run asymmetries imply that the sequencing of trade reforms matters for welfare.

Date: 2017
New Economics Papers: this item is included in nep-dge and nep-int
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