Asset markets and individual trade policy preferences

JoAnne Feeney and Arye Hillman ()

No 282, Discussion Papers, Series II from University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy"

Abstract: Protectionist industry interests stem from nondiversified individual income which derives from industry-specific factor ownership. This paper investigates how access to domestic and international asset markets moderates industry-affiliated individuals' preferences for protectionist trade policies. We consider an economy where individuals with industry-specific holdings of human and physical capital confront real-income risk due to uncertainty in the economy's terms of trade. White human capital is nontradeable, noncontingent asset markets permit the exchange of ownership of physical capital. We establish conditions by which domestic asset markets can create a consensus for free trade. These conditions would not in general be expected to be realized. We then proceed to show how the addition of access to international asset markets has a liberalizing influence on individuals' preferred trade policies, and how the internationally tradeable assets of an economy's nontraded-goods sector further liberalizes individuals' policy preferences. The predictions of the model are consistent with the greater proclivity to liberalization of trade policy in market economies with developed domestic asset markets, liberal foreign investment opportunities, and sizeable nontraded-goods sectors. The model is also consistent with observed historical trade policy phenomena.

Date: 1995
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