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Unequal gains, prolonged pain: A model of protectionist overshooting and escalation

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  • Blanchard, Emily
  • Willmann, Gerald

Abstract

We develop a model of democratic responses to macroeconomic shocks, and show that when economic adjustment is slower than potential political change, economic shocks can trigger populist surges. Applied to trade policy, we show that unexpected changes in world prices or skill biased technological change can induce a surge in economic nationalism and trade protection. Over time, the initial protectionist surge will gradually diminish if and only if educational gains enable less-skilled workers to catch up with the overall economy. The more unequal the initial distribution of the returns to human capital, the greater and longer-lasting the protectionist backlash will be: unequal gains, prolonged pain. Key data markers suggested by the model exhibit patterns consistent with recent surges in protectionism in the US and UK.

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  • Blanchard, Emily & Willmann, Gerald, 2022. "Unequal gains, prolonged pain: A model of protectionist overshooting and escalation," Journal of International Economics, Elsevier, vol. 135(C).
    • Handle: RePEc:eee:inecon:v:135:y:2022:i:c:s0022199621001392
    DOI: 10.1016/j.jinteco.2021.103559
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    More about this item

    Keywords

    Populism; Protectionism; Overshooting; Dynamic political economy; Human capital; Education; Overlapping generations; Endogenous tariffs;
    All these keywords.

    JEL classification:

    • F5 - International Economics - - International Relations, National Security, and International Political Economy
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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