Import Protection Bias

Abstract

Rodrik (1995) notes that trade regimes tend to be biased towards import protection. Meanwhile, the standard political economy models either yield no prediction on the bias of the trade regime, or predict, counterfactually, a bias towards the export sector. Rodrik argues that import protection bias in developing countries might be explained by the revenue effects of the two policies. 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 income 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 to the model, plausible values of the model's parameters yield import protection bias.

Keywords: Endogenous Trade Policy, Import Protection Bias, Protection for Sale Model

JEL Classification: F13, D72