Trade policy on a country basis and multilateral arrangements: The case of Uruguay

This paper sheds some light on two issues related to recent the multilateral trade agreements (Ronda Uruguay of GATT and the creation of WTO). First, are they binding for the design of trade policies in Uruguay? Second, how have they posed restrictions on these policies? In the first chapter a revision of the trade policies developed in Uruguay along the last decades is done, with a historic perspective. It is there concluded that Uruguay has had a continuous unilateral pro-liberalization position. The description of government institutions and private lobby groups is used in the second section to analyze the process. There is enough evidence supporting the hypothesis that the trade liberalization process can be thought of as a political equilibrium between government and private lobby groups. Finally, the paper concludes that multilateral agreements are increasingly determining the characteristics of trade policies in Uruguay.

How and when a unilateral trade reform could be a political equilibrium

In the paper the endogenous trade model follows the Grosman and Helpman (1994 y 1995) tradition. The structure of the economy is characterised by a specific factor trade model and consumers' preferences are quasilinears. Owners of specific factors all are organised in lobby groups and the ownership are very concentrated.The available options to the government are mantain the trade policy status quo or implement an opening trade reform. Lobbys group influence this discretional government with income contribution taking into account its own objective function. The equilibrium of the game is studied in two differents situations: without exceptions in the trade liberalisation; with the presence of sector exception list. It is shown that a commercial opening that is not a political equilibrium (it is not incentives compatible) when the government wants to make it in general, however can be so if the government is able to isolate certain sectors from the international competition, through long periods of adjustment (given by gradual policies or the existence of exceptions list). The results are illustrated applying the model to the case of a trade reform in a developing country (Uruguay).

Endogenous number of lobby groups in a specific factor trade model

The basic goal of this paper is to develop an endogenous trade policy model in the Grossman and Helpman (1994) tradition that could endogenise the number of lobby groups in the economy. The game has three stages. In the first stage, the consumer that owns a specific factor decides whether to organise or not in pressure groups. In the second one, the lobbies (organised groups of consumers) select the contributions (income transfers) they are willing to make to influence the government's actions. Finally, in a third stage of the game the government establishes the trade policy. This chapter highlights two main results. The first one is that contribution is a dominant strategy for each lobby group, thus the sub-game perfect equilibrium implies all the lobby groups being active (L=N). The second one is related with the welfare evaluation of this equilibrium. It is well known in the literature that this equilibrium is efficient (in a Pareto sense) but it is also important to analyse what happen when only the lobby welfare is considered. The conclusion is that being organised and defending a particular interest is better than not being organised, given that the others are not organised (or only some are), because it is possible to obtain an advantage in the political relationship with the government. On the other hand, since the other antagonic groups (one or some) are organised in lobbies, it is possible to reduce the damage from the distortions created by their influence on the government’s actions. An implication of this result is that many times in societies with a multiplicity of specific interests organised corporately, typically all finish in a worst situation than if they were not organised, arriving to a prisoner's dilemma outcome, if only the lobby’s welfare is considered.

Endogenous trade policy and political contributions in a standard-trade model (HOS trade model)

The paper developed a political economy model about endogenous trade policy along the lines of the well known contribution of Grossman and Helpman (1994). In our case the structure of the economy is standard (neoclassical trade model instead of the specific factor trade model of the original paper) and more general (preferences are not quasilinear). In this new environment an equilibrium of the game is derived. Two basic proposition resume the results related to the level of the trade policy instruments set by the policy makers and the political contribution made by the active group of consumers (lobbies). This new general result is analysed in a particular small economy abundant in a factor different from labor, e.g. natural resources.Three cases are studied to present the results of the two general propositions according with the different active lobby in the contribution game :labor unions that allow the income contribution of workers to influence the trade policy; factor owners associations that allow the income contribution of the others consumers in the other extreme of the income distribution; contributions of both types of consumers workers and owners.

How and When a Unilateral Trade Reform Could be a Political Equilibrium

In the paper the endogenous trade model follows the Grosman and Helpman (1994 y 1995) tradition. The structure of the economy is characterised by a specific factor trade model and consumers' preferences are quasilinears. Owners of specific factors all are organised in lobby groups and the ownership are very concentrated.The available options to the government are mantain the trade policy status quo or implement an opening trade reform. Lobbys group influence this discretional government with income contribution taking into account its own objective function. The equilibrium of the game is studied in two differents situations: without exceptions in the trade liberalisation; with the presence of sector exception list. It is shown that a commercial opening that is not a political equilibrium (it is not incentives compatible) when the government wants to make it in general, however can be so if the government is able to isolate certain sectors from the international competition, through long periods of adjustment (given by gradual policies or the existence of exceptions list).

Trade and wages in Uruguay in the 1990’s

The main facts of the Uruguayan labour market along the nineties may be summarized in three main phenomena: increase in wage inequality with an increase of the skill wage premium and changes in the inter-industrial wage structure; destruction of unskilled jobs, associated to trade openness and changes in the productive specialization that implied technical change biased to the employment of workers with higher skill; decrease of the role of unions in wage negotiation. This paper attempts an empirical strategy to evaluate the impact of increased trade openness in the industry wage premiums and in the skill wage premiums, combining micro and macro data. We find a link between trade openness and both industry and wage premiums in the 1990’s in Uruguay: in a given industry, reduced protection implied an increase in the skill premium and a lower industry relative wage

Public Expenditure on Education and Skill Formation: Is There a Simple Rule to Maximize Skills?

The ratio of skill to unskilled labour stocks in the economy is widely acknowledged to have an important role for development. Can education policy affect the evolution of this ratio? This paper shows that it can, and it also shows that the actual effect of education policy depends on the allocation rule of the budget across educational levels. The consideration of a stylized hierarchical education model allows us to develop analytical conditions under which the allocation rule favours the accumulation of skills. The analysis has implication for policy makers in developing countries, where skill formation is much needed, because it shows that observed allocation rules usually violate the maximization condition by the assignment of higher-than-optimal resources to higher education.education budget, skills accumulation

Micro and Macro Determinants of trade temporary barriers: the Brazilian case over the last two decades

When the process of trade liberalisation started in Brazil in the late 1980s, a regime of temporary trade protection was put in place. This paper describes the use of TTB by Brazilian’s authority over the last two decades. We found them to be highly concentrated in a few sectors and to heavily rely on antidumping measures, rather than countervailing or safeguards measures. We also develop a simple empirical model to explain the micro and macroeconomic determinants of TTBs in Brazil. After controlling for the political strength of each HS six-digit sector in Brazil, as well as the time invariant characteristic of each trading partner and the level of domestic economic activity using fixed effects, we found that low import prices are not an important determinant of TTB in Brazil even though more than ninety percent of TTB that were put in place over the last two decades were antidumping cases. TTBs are more likely to be observed when imports are large. But, perhaps more interestingly, in sectors with low MFN tariffs and where MFN tariffs are falling, which suggest that MFN tariffs and TTBs are substitutes. Finally, changes in the bilateral exchange rate are important determinants of TTBs, with appreciations of the domestic currency making the imposition of restrictive TTBs more likely.Temporary Trade Barriers, Brazil, Exchange rate

Winners and Losers in a Free Trade Area between The United States and MERCOSUR

This document considers an eventual Free Trade Area between the US and MERCOSUR with the objective of constructing two lists of products (HS 6 digits), one expansive (trade opportunities) and one defensive (trade perils), for each of the participants in the agreement. The theoretical model of reference is the Grossman and Helpman model of the politics of Free Trade Agreements. An original methodology for the opportunities and perils determination based on trade specialisation indexes and trade policy data has been developed. The economic size asymmetries have been introduced into the analysis through an empirical implementation of the regimes of protection typology provided by the theory (enhanced and reduced protection). The main conclusions are: i) agricultural producers in the US face a peril while agricultural producers in MERCOSUR could have opportunities (improvement in international prices); ii) there are no evident opportunities for US producers in the MERCOSUR (reduced size of the market) while producers of manufactures in the MERCOSUR face an evident peril in the regional market; and iii) MERCOSUR opportunities are concentrated in lighter manufactures.