Look before you leap: Why politicians may have a point to be hesitant about the gains from trade |
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| Institution: | 1. University of Hamburg, Germany;2. GIGA German Institute of Global and Area Studies, Institute of Asian Studies, Rothenbaumchaussee 32, 20148 Hamburg, Germany;3. Radboud University Nijmegen, Department of Economics, P.O. Box 9108, 6500 HK Nijmegen, The Netherlands;1. Charles University in Prague, Institute of Economic Studies, Opletalova 26, CZ-11000 Prague, Czech Republic;2. Czech National Bank, Na Příkopě 28, CZ-11503 Prague, Czech Republic;3. Joint Vienna Institute, Mariahilfer Strasse 97, 1060 Vienna, Austria;1. Key Lab of Aerosol Chemistry & Physics, SKLLQG, Institute of Earth Environment, Chinese Academy of Sciences, Xi''an, 710061, China;2. Now at Department of Atmospheric Sciences, National Taiwan University, Taipei, 10617, Taiwan;3. Center for Excellence in Urban Atmospheric Environment, Institute of Urban Environment, Chinese Academy of Sciences, Xiamen, 361021, China;4. National Center for Atmospheric Research, Boulder, CO 80303, USA;5. Institute of Global Environmental Change, Xi''an Jiaotong University, Xi''an, 710049, China;6. Laboratory of Atmospheric Chemistry, Paul Scherrer Institute, 5232 Villigen, Switzerland;7. Department of Environmental Sciences and Engineering, Tsinghua University, Beijing, 100084, China |
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| Abstract: | Economists emphasize the welfare gains of unrestricted trade, but politicians worry about the income distribution effects of increased competition. We show that the welfare gains of a trade shock become ambiguous if inaccurate information hinders optimal income redistribution with distortionary policy instruments. To be sure about the net welfare outcome of a compensated trade shock, the government must know the size of the trade shock and the corresponding size of the policy instrument that is needed to generate a balanced budget. If this is not the case, politicians may have a point when being hesitant about the gains from trade. |
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| Keywords: | Trade policy Income distribution Compensation schemes |
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