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Revenue Motives and Trade Liberalization
Author(s) -
Feldman David H.,
Gang Ira N.
Publication year - 1996
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.1996.tb00103.x
Subject(s) - economics , tariff , revenue , liberalization , free trade , shock (circulatory) , international economics , maximization , monetary economics , microeconomics , market economy , finance , medicine
Governments in more‐developed economies partially compensate import‐competing industries when world prices fall, i.e., they lean against the wind. Less‐developed economies often liberalize in response to the same shock. We use a political‐support maximization model with revenue motives to derive conditions under which a rational policymaker would respond to lower woild prices by reducing tariff protection for an import‐competing industry. An initial tariff that exceeds the maximum revenue level proves necessary but not sufficient for politically optimal liberalization following a fall in the world price of the importable good.