Building Trade Barriers and Knocking Them Down

This paper examines the dynamic behavior of trade protection and liberalization. Consistent with evidence on the development of trade policies, policy decisions are modeled as the outcome of a political contest between import-competing interests and exporters. Uncertainty about the success of political contests yields a dynamic equilibrium in which tariffs gradually increase over time. Eventually, increasing tariffs reduce profits in the exporting sector to such a degree that exporters enter the political arena and lobby actively against protection. Depending on the market characteristics, a political contest may generate a liberalization or a move toward autarky.