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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.
