Household inequality, welfare, and the setting of trade policy

Household inequality, welfare, and the setting of trade policy

Published Jan 2005

Authors

J. Francois, H. Rojas-Romagosa

Publisher

Focus themes

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Effects of trade policies on household inequalities

This article analyses general equilibrium relationships between trade policy and the household distribution of income. It examines the formal link between social welfare and the equilibrium determinants of the distribution of income, and produces theoretical predictions between trade protection, country size, level of development, and personal income inequality.

Specific findings of the paper include:

  • outcomes of the study complement the existing literature that links trade policy to factor incomes and the functional distribution of income
  • in representative democratic systems positive optimum tariffs can be sustained in capital-abundant countries even when the policy-maker assigns a low or zero weight to the contributions of special interests groups
  • in this case, the positive distributional effect of import protection can offset or compensate the efficiency losses of reduced trade
  • in poor countries, characterised by the relative abundance of labour, positive tariffs are explained by the influence of special interest groups (i.e. capitalists) that heavily lobby for higher tariffs
  • import protection in LDCs therefore not only diminishes social welfare through efficiency and equity considerations, but also signals the economic and political weight of the capital-owners.

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