NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism

Sweder van Wijnbergen

NBER Working Paper No. 2261
Issued in May 1987
NBER Program(s):   ITI   IFM

Using a standard complete specialization model of a small open economy within a rigorous intertemporal optimization framework with contract- based wage rigidity, we show that permanent tariffs may lead to a current account deterioration and a fall in employment, contradicting most of the literature of macro-economic effects of import tariffs. I show that this will always be the case if the economy is small enough. The crucial factor in this complete reversal of standard results is the impact of tariffs on domestic real product wages via wage indexation. Temporary tariffs will have less of a negative impact on the CA or potentially even a positive impact, because they increase the consumption rate of interest (the terms at which future consumption can be traded for current consumption) and so increase private savings. Extensions towards incorporating a more general production structure, investment and the use of tariff revenues to provide wage subsidies are presented.

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Document Object Identifier (DOI): 10.3386/w2261

Published: International Economic Review, Vol. 28, no. 3 (1987): 691-706.

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