Import Protection Bias

Abstract

Rodrik (1995) notes that trade regimes tend to be biased towards import protection, while the standard political economy models either yield no prediction on the bias of the trade regime or predict, counter-factually, a bias towards the export sector. This constitutes an important shortcoming in the political economy of trade literature. In this paper, the Grossman and Helpman (1994) Protection for Sale model is extended by adding government expenditure. This expenditure may be financed via a combination of tariff revenue and a distorting wage tax. In addition to the government expenditure, export subsidies need to be financed either via tariff revenue or a distorting wage tax. With this addition, plausible values of the model's parameters yield import protection bias.