Declining Industries and Persistent Tariff Protection

The paper uses a political economy framework to explain the empirical observation that trade protection is persistent. The assumptions that are shown to generate endogenous tariff persistence in the model are quite plausible: agents are uncertain about future prices, tariffs are affected by political pressure, and pro-ducers of the import-competing good own sector-specific human capital that may be lost if they exit the industry. The model also reveals that, under the conditions listed above, industries decline gradually in response to a price shock even when producers do not face increasing costs of adjustment. 1