Costly revenue-raising and the case for favoring import-competing industries

Abstract

A standard finding in the political economy of trade policy literature is that we should expect export-oriented industries to attract more assistance than importcompeting industries. In reality, however, trade policy is heavily biased toward supporting import industries. This paper shows within a standard protection for sale framework, how the costliness of raising revenue via taxation makes trade subsidies less desirable and trade taxes more desirable. The model is then estimated and its predictions tested using U.S. tariff data. An empirical estimate of the costliness of revenue-raising is also obtained. Journal of Economic Literature Classification: F13, F16

A Commitment Theory of Subsidy Agreements

“…The substitutability between subsidies and tari¤s leads to an excessive use of the latter policy as the interest group would relocate its political pressures from the domestic to the border policy. 22 This …nding is similar to the "chilling e¤ect" on tari¤s found in Bagwell and Staiger (2006). As the policy substitution problem is not solved, SP rules do not help the government to credibly commit its policy stance.…”

“…Thus, the domestic price of the manufactured good is p y = p + t, while net revenue to producers is given by p x = p + t + s. The government uses tax and tari¤ revenue to …nance the production subsidy and any other expenditures (denoted as E). We follow Matschke (2008) and assume that raising revenue is costly for the economy: in order to spend 1 unit, the government has to raise units, where 1. In other words, taxation imposes a deadweight loss to society equal to ( 1).…”

“…We will consider the allocation of capital under various regimes, but recall that in all cases the level of protection is a function of the level of capital: (t(k); s(k)). To simplify notation, we will write (k) c(k) (t(k); s(k); k) c(t(k); s(k); k) as in equations (15), (19), and (22).…”

On the Political Substitutability between Tariffs and Subsidies

“…The amount of capital in this economy is fixed and owned 2 Notice that if λ > 1 taxation is distortionary and it imposes a deadweight loss on society equal to (λ − 1)sx. Matschke (2008) by a subset of the population of measure zero. The first sector, which we will refer to as the numeraire sector, produces a non-tradable good the price of which we normalize to one.…”

Endogenous trade policy in general equilibrium: An interaction of redistribution rule, trade openness, and labor market condition

“…The lobby groups choose these schedules simultaneously and non-cooperatively with the anticipation of government's movement in the second stage. Some of the empirical studies in this area are: Goldberg and Maggi (1999), Gawande and Bandyopadhyay (2000), Eicher and Osang (2002), Mitra, Thomakos, and Ulubasoglu (2002) Gawande, Krishna, and Robbins (2006), and Matschke (2008). in the third stage, the production and consumption decisions are made. Then subsequently, 1 Grossman and Helpman's paper has been the most influential one in terms of both theory and empirical estimation of endogenous trade policy.…”