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

Abstract

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).