Whom to Send to Doha? The Shortsighted Ones!

Analyses of the effects of trade policies focus on comparisons of two different

steady states, restricting the investigation to the long run. In order

to account for the adjustments and to capture the relevant transmission

mechanisms of changes in trade costs, such as market size, entry and exit,

as well as productivity changes of firms, we base our trade policy analysis

on a dynamic new trade theory model. This approach has two advantages.

(i) It allows us to take account of the transitional process after a change

in tariffs. (ii) It allows us to take account of the shortsightedness of policy

makers. We show that Nash-equilibrium tariffs based on a dynamic trade

model are lower than Nash-equilibrium tariffs based on a static model.

We also show that shortsighted politicians tend to set lower tariffs than

politicians with a longer planning horizon.