Varying Political Economy Weights of Protection: The Case of Colombia

Abstract

In this paper, we examine trade policy determinants and trade reform in a developing country setting by using a political economy model. The government determines tariffs by balancing the political support from producers versus consumers, while placing a higher political weight on producers' welfare relative to average citizens. We then expand the model in several directions to guide our subsequent estimations at the three-digit industry level for Colombia between 1983 and 1998. We account for import substitution motives for protection but describe how the government's move away from these policies leads to unilateral trade liberalization. We innovatively allow the political weights to vary based on key industry variables beyond a common denominator. The sectors with higher employment, labor cost, and preferential trade agreement (PTA) import shares receive a larger political weight compared to otherwise similar sectors. The novelty of our approach is estimating the effect of sectoral characteristics on protection filtered through the political weights. We obtain more realistic estimates for these weights and provide some evidence for a slowing down effect of PTAs on trade liberalization.

Keywords: Political economy of trade policy, trade liberalization, preferential trade agreements, empirical trade

JEL Classification: F13, F14, F15