Commercial policy is often advocated as a useful tool for combating such macroeconomic ills as unemployment and chronic balance of payments deficits. This paper examines the role of expectations in determining the output and effects of various commercial policies. In a rational expectations framework in which workers have incomplete information, it is shown that (i) the shortrun output and effects of commercial policy changes depend crucially on the correlation between real and nominal wages and that (ii) the use of commercial policy as an instrument of short-run stabilization policy cannot be divorced from its long-run effects on real wages, output, and employment. I. INTRODUCTION One of the most persistent arguments against free trade is that tariffs, import quotas, and other protectionist devices are useful tools for combating such macroeconomic ills as unemployment and chronic balance of payments deficits. For example, it has been, and still is, argued that by shifting demand from foreign to domestic goods, a tariff will increase and improve the balance of payments. It was this kind of reasoning that led the U. S. Congress to enact the Smoot-Hawley tariffs in 1930 during the early stages of the Great Depression and that two years later resulted in Great Britain ending almost a century of free trade by adopting the Import Duties Act. In recent years, these sentiments have perhaps been part of the intellectual foundation for the new protectionism. In light of this, it is important to reassess the theoretical basis of these macroeconomic arguments for protection. The employment argument for protectionist policies has been discussed by Mundell [1961], Tower [1973], Boyer [1977], Chan [1978], Eichengreen [1981], and Krugman [1982]. One common element of all these papers, with the exception of Eichengreen [1981] and Krugman [1982], is that they do not discuss the role, if any, played by expectations in determining the output and effects of commercial policy. The importance of expectations for macroeconomic stabilization policy has been the