What Are the Consequences and Determinants of Trade Protection?

This research examines two questions that are at the heart of the study of international economics: First, what effects do trade policies (such as import tariffs) have on economic outcomes such as imports, exports, and tariff revenue? And second, which groups of society are relatively favored by the trade policy that is in place at any given time? Economists use elaborate numerical simulations to answer the first of these questions, both in order to evaluate policy changes that have already happened and to predict the potential consequences of policy proposals. The research in this project develops new statistical procedures that can be used to assess the validity of such simulations. Provided such simulations pass these validity tests, they can then be used to quantify how imports and exports impact the real incomes of different groups of society (based, for example, on their sector of employment or their region of residence). The patterns of such estimated impacts are then used in the project to understand the extent to which any given policy (such as the one currently in place for a given setting of interest) benefits and/or harms distinct groups, without the need to take a stand on how that policy was arrived at or what stated goals may have been behind its origination. The first component of this research focuses on the welfare consequences of trade protection. Historically estimates of such impacts have relied on the counterfactual simulations of quantitative trade models. To help assess and potentially strengthen the credibility of the predictions of quantitative trade models, this research develops a new testing procedure that is intuitive, easy to implement, and consistent with standard practices in the field. This procedure is then applied to the dramatic tariff changes that took place among the United States and certain trading partners in 2018. The second component focuses on the political-economy determinants of trade protection. The starting point is a new and general optimal tariff formula that relies on the assumption that trade taxes are constrained Pareto efficient, but otherwise does not require any restriction on preferences, technology, market structure or the specifics of the political process. This formula highlights how optimal tariffs vary with the Pareto weights of different constituents of society -- which reflects the political determinants of trade protection -- as well as how marginal changes in imports affect their real earnings -- which reflects the economic determinants of trade protection. Empirically, the research begins by estimating these economic determinants (in the same 2018 context as for the first component) and then combines them with the new formula for optimal tariffs in order to estimate what Pareto weights must be given the observed cross-sectional variation in trade policy. Armed with such non-parametric estimates of political determinants of protection, a final step of the research seeks to quantify the extent to which they can be accounted for by leading political-economy models of trade policy. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.