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Do Big Governments Promote Trade Liberalization? A Long-Term Analysis of 18 OECD Countries, 1975-2000

Document language: 
English
Publication number: 
2016-02
Publication type: 
Working Paper
Author(s): 
Federico Podestà
Abstract: 

This paper investigates the relationship between state intervention and trade policy in selected OECD countries over recent decades. It starts from the general hypothesis that big governments promote trade liberalization, whereas small ones limit it. It does so on the basis of the assumption that the pre-existing internal compensation can be employed as a functional equivalent of trade restrictions in protecting the social segments, such as low-skilled workers, most damaged by trade exposure. Moreover, since the political processes underlying the nexus between interventionism and trade restrictions need a quite long period of time to modify and to exert their effects on public policy, such a nexus is examined from a long-term perspective. In this regard, two issues are addressed. The first concerns the hypothesis and the consequent testing, via a battery of error-correction models, of the existence of a long-term equilibrium relationship. Specifically, if government intervention is employed before and as a substitute for trade policy, one should expect that they flow together over time to maintain a certain protective balance. Consequently, any deviation of internal protection would be corrected over time as the protectionism returns to its long-run equilibrium relationship with government intervention. The second issue regards an increasing weakening of the negative nexus between interventionism and trade policy associated with the structural decrease in low-skilled workers. Error correction models for separate time periods and yearly repeated cross-section regressions have made it possible to evidence this progressive weakening.

Keywords: 
Trade liberalization,
Government intervention,
Long-term equilibrium,
Compensation Hypothesis
Date: 
January, 2016