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Favoritism in the Fragmented Economy: Measuring Distributional Aspects of Trade Policy [Draft]
Abstract: I propose a novel favoritism index that captures the distributional effects of trade policies within an economy. The index does not rely on direct measures of trade policy, which are often difficult to observe. Instead, I extend the political economy model of protectionism in Grossman and Helpman (1994) and embed it in a multi-country, multi-industry general equilibrium framework to recover the industry weights in the planner’s objective function that rationalize the prevailing vector of trade policies. Leveraging detailed international input-output data, I construct the favoritism index for 44 industries, including service industries, across 76 countries over 26 years (1995-2020). The recovered parameter is consistent with the industry-level lobbying expenditure and with an independent measure of sectoral policy interventions from Global Trade Alert. I further report that favoritism index is systematically related to several dimensions of economic activity, including exposure to import competition and dynamic domestic labor market performance. Favoritism is also systematically related to exposure to import competition and to the dynamics of domestic industry employment. Finally, U.S. counties experiencing larger declines in favoritism exhibit shifts in presidential vote shares toward Republican candidates beginning in 2016 and persisted in the 2020 election, suggesting that the distributional consequences of trade policy have become increasingly salient in explaining regional variation in electoral outcomes.
The Market Potential and Optimality of Industrial Policy: Revisiting Korean Industrial Policy in the 1970s (With Seungjin Baek) [paper]
Abstract: We assess optimal industrial policy factoring in external economies of scale under changing global market conditions. Since policy effects naturally materialize with a time lag, policy assessment should compare the short-run distortion of the intervention to its long-run gain. In this context, we expand the small open economy model of Bartelme et al. (2021) into a two-period dynamic setting to figure out how important the dynamics of global market conditions are in determining optimal policy. Optimal industrial policy in our model depends not only on the scale elasticity, but also on a multiplier which is larger when more resources are re-allocated to the industry in the long-run based on export market penetration. This optimal policy implies that an industry with a growing future market should receive stronger support than earlier papers suggest. We quantitatively evaluate the industrial policy of South Korea in the 1970s. With the estimate of the scale elasticity of 29 manufacturing industries, our quantitative analysis presents two main results. First, even though the scale elasticity of targeted industries is virtually the same as that of non-targeted industries, the industrial policy increased the welfare of South Korea. Second, the suggested optimal subsidy rate for the targeted industries is even higher than the actual historical rate.
Work in Progress
Outrunning to the Large Market: Bilaterial Trade Agreements and the Bystander Effect
Granular Production Network
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