Trade Preferences and Political Equilibrium Associated with Trade Liberalization

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