INFANT INDUSTRY AND POLITICAL ECONOMY OF TRADE PROTECTION

Abstract.  This paper introduces infant-industry considerations in political economy determination of trade protection. I build a model where the government cares about both political contributions and national welfare. A potentially beneficial high-tech industry is not viable in the country whose initial human capital is low. In the political economy equilibrium, we find that the tariff schedule will be V-shaped: it decreases initially to maintain the viability of the industry but increases thereafter as the industry expands and gains political power. We use the model to explain both China's tariff offers in WTO negotiations and GATT/WTO rules regarding developing countries.