[Source: Dan Rodrik's weblog, May 04 2007]
- The liberalization must be complete or else the reduction in import restrictions must take into account the potentially quite complicated structure of substitutability and complementarity across restricted commodities.
- There must be no externalities or microeconomic market imperfections other than the trade restrictions in question, or if there are some, the second-best interactions that are entailed must not be adverse.
- There must not be any increasing returns to scale, or else activities with scale economies must expand "on average."
- The home economy must be “small” in world markets, or else the liberalization must not put the economy on the wrong side of the “optimum tariff.”
- The economy must be in reasonably full employment, or if not, the monetary and fiscal authorities must have effective tools of demand management at their disposal.
- The income-redistributive effects of the liberalization should not be judged undesirable by society at large, or if they are, there must be compensatory tax-transfer schemes with low enough excess burden.
- There must be no adverse effects on the fiscal balance, or if there are, there must be alternative and expedient ways of making up for the lost fiscal revenues.
- The economy must not have a trade deficit that is already "too large," or else nominal wages or the exchange rate must adjust to compensate.
- The liberalization must be politically sustainable and hence credible so that economic agents do not fear or anticipate a reversal.
I have highlighted the items and phrases i do not yet understand for future study.
Update (05-10-2007 8:05pm): Thanks to commenter Gabby D. for his explanation on optimum tariffs. (I will be highlighting in green the items that i begin to understand.) I also got some further explanation on how a large country benefits from such a policy.
"Large countries are defined as those with the ability to significantly affect world prices. In other words, a large country faces upward sloping foreign supply curves for the agricultural commodities it imports. Thus, changes in domestic policies and other variables in the country would, by definition under a large country scenario, alter international prices and trade flows, implying the exercise of market power...For example, Chinese restriction of imports following the 1995 world grain price increases may be justified within an optimal tariff framework. Chinese limitations on imports may have helped to keep world prices lower than they would have otherwise been since 1996, reducing Chinese import costs. Hence, self-sufficiency may be defended not only on political economy grounds, but also for reasons of trade policy efficacy."[Source: Zhuang Renan, 2005, China's agricultural trade: An optimal tariff framework perspective, Purdue University]