DP391 | Why is Trade Reform So Unpopular?

Publication Date

01/03/1990

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Abstract

Despite the well known gains from trade, trade liberalization is one of the most politically contentious actions that a government can undertake. We propose and formalize a new explanation of this unpopularity. The explanation is based on uncertainty and is complementary to the usual explanations: many individuals will simply not know how they will fare under trade reform, and this can reduce support for a reform which would otherwise have been popular, even in the absence of risk aversion. We show that reforms that would have received adequate popular support ex post (i.e. that once enacted will last) may fail to carry the day ex ante because of uncertainty regarding the distribution of gains and losses. Moreover, the role of uncertainty in determining the outcomes is not symmetric, in that reforms which are initially rejected will continue to be so in the future while reforms that are initially accepted may find themselves reversed over time. We discuss empirical illustrations drawn from the experiences of South Korea, Chile and Turkey to provide support for the new explanation.