Choosing between Protectionism and Free Trade in an Uncertain World

46 Pages Posted: 27 May 2015

See all articles by Peter Marcel Debaere

Peter Marcel Debaere

University of Virginia - Darden School of Business; Centre for Economic Policy Research (CEPR)

Toni Glaser

Bielefeld University - Department of Business Administration and Economics; KU Leuven

Gerald Willmann

Bielefeld University; IfW Kiel; KU Leuven; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 2015

Abstract

We develop a two-sector, two-factor general equilibrium model of international trade with imperfect short-term mobility of one factor that features uncertainty about sectoral productivity, and hence uncertainty about the terms of trade. Uncertainty resolves after the sectoral capital allocation has been decided. We show that the capital allocation chosen by producers need not be welfare maximizing if producers and consumers have differing attitudes to risk. In a small country facing uncertain terms of trade, risk-neutral producers specialize more in exporting than is preferred by risk-averse consumers. From a national welfare perspective this misallocation can justify the use of trade policy that deviates from free trade. In the general case with uncertainty in both countries, there exists a trade-of between trade as insurance against domestic shocks, and protection as insurance against foreign shocks. In our framework, the optimal trade policy of a country is thus very much a function of its particular circumstance: the nature of its comparative advantage and especially the size and correlation of domestic vs. international shocks that a country faces. The model we propose can explain the persistent protectionism especially in sectors such as agriculture.

Keywords: trade policy

JEL Classification: F1

Suggested Citation

Debaere, Peter Marcel and Glaser, Toni and Willmann, Gerald, Choosing between Protectionism and Free Trade in an Uncertain World (May 2015). CEPR Discussion Paper No. DP10625, Available at SSRN: https://ssrn.com/abstract=2610760

Peter Marcel Debaere (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/html/direc_detail.aspx?styleid=2&id=5794

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Toni Glaser

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Gerald Willmann

Bielefeld University ( email )

Universit├Ątsstra├če 25
Bielefeld, NRW 33613
Germany

IfW Kiel ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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