Trade Preferences and Political Equilibrium Associated with Trade Liberalization

25 Pages Posted: 28 Oct 2013 Last revised: 12 Sep 2014

See all articles by Shoya Ishimaru

Shoya Ishimaru

University of Wisconsin-Madison

Soo Hyun (Catherine) Oh

Korea Institute for International Economic Policy

Seung-Gyu Sim

Aoyama Gakuin University

Date Written: August 2014

Abstract

This paper, motivated by the so-called North-South problem in trade, analyzes ex ante trade preferences and the source of potential political conflicts regarding trade lib- eralization. Developing a dynamic extension of the traditional Heckscher-Ohlin model with imperfect labor mobility and tracking overall dynamic paths from the autarky to free-trade steady states, we demonstrate that in the presence of intersectoral migration barrier, bilateral free trade agreements can be welcomed (opposed) by the majority of workers in a capital-abundant (labor-abundant) country, which is inconsistent with the welfare prediction by Stolper and Samuelson (1941). This paper also proposes a numerical algorithm to solve for the entire transition path of the model under rational expectation. Our simulation experiments further reveal that preannounced and delayed implementation can facilitate a bilateral free trade agreement by partially neu- tralizing short-run transitional gains and losses so as to persuade the losers to support the reform without affecting the beneficiaries’ trade preferences.

Keywords: trade liberalization, trade preferences, transition dynamics

JEL Classification: F10, F11, F16, J64

Suggested Citation

Ishimaru, Shoya and Oh, Soo Hyun (Catherine) and Sim, Seung-Gyu, Trade Preferences and Political Equilibrium Associated with Trade Liberalization (August 2014). Available at SSRN: https://ssrn.com/abstract=2345788 or http://dx.doi.org/10.2139/ssrn.2345788

Shoya Ishimaru

University of Wisconsin-Madison ( email )

1180 Observatory Drive
Madison, WI 53706
United States

Soo Hyun (Catherine) Oh

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Seung-Gyu Sim (Contact Author)

Aoyama Gakuin University ( email )

4-4-25 Shibuya, Shibuya-ku
Tokyo, 150-8366
Japan

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