Trade liberalization versus protectionism: Dynamic welfare asymmetries

Abstract

We investigate whether the losses from an increase in trade costs (protectionism) are equal to the gains from a symmetric decrease in trade costs (liberalization). We incorporate dynamics through capital accumulation into a multicountry trade model and show that the welfare changes are asymmetric: Losses from protectionism are smaller than the gains from liberalization. In contrast, standard static trade models imply that the losses equal the gains. The intuition for asymmetry in our model is that, following protectionism, the economy can coast on its previously accumulated capital stock, so higher trade costs do not imply large losses immediately. We develop an accounting device to decompose the source of welfare asymmetries into three time-varying contributions: share of income allocated to consumption, measured productivity, and capital stock. Asymmetry in capital accumulation is the largest contributing factor, and measured productivity is the smallest.