Monday, August 3rd
In Young Park (Princeton), Rational Cycles of Protectionism: Economic Uncertainty and Trade Policy in the Long Run
While it is commonplace to assume that, ceteris paribus, uncertainty generates aversion to policy reforms, I show here that in the context of trade, price uncertainty can render reform more appealing. The ability to adapt to changed prices attenuates individuals aversion to downside risk, while it potentiates the upside prospects of favorable shifts in price. In the protectionist status quo, uncertainty about free trade prices will draw individuals who gain from protection to favor free trade, while uncertainty about au- tarkic prices can draw winners of a free trade status quo to advocate protection. In the presence of uncertainty, trade policy has a heartbeat of its own: it will be inherently, and rationally, cyclical.