Phasing In and Phasing Out Protectionism with Costly Adjustment of Labour.

The authors study the dynamics of optimal trade policy in a model with costly intersectoral adjustment of labor, where migrants pay less than the marginal social cost of migration. If workers have rational expectations, a future tariff has an announcement effect on the current migration decision. If the government is able to commit itself to future policy, the optimal trajectory involves phasing in and then phasing out protection of the dying sector. This contrasts with recommendations of gradual liberalizations. Without the ability to make commitments, the equilibrium policy begins with and maintains free trade. Copyright 1994 by Royal Economic Society.