Conflict Between Import Tariff and Export Subsidy: A General Equilibrium Analysis

This article compares the effect of a reduction in import tariffs and export subsidies as a measure of trade liberalisation on skilled and unskilled labour wage inequality and unemployment of unskilled labour. We use a competitive general equilibrium model with three sectors and three factors. Three sectors are the high-skilled manufacturing sector, the low-skilled manufacturing sector and the agricultural sector. The high-skilled manufacturing sector uses skilled labour and capital as factors of production. The low-skill manufacturing and agricultural sectors use unskilled labour and capital as factors of production. Low-skill manufacturing pays a fixed wage rate, resulting in unskilled labour unemployment. We find that a fall in import tariffs in the highly skilled manufacturing sector lowers wage inequality but raises unskilled labour unemployment. A fall in import tariffs in the skilled manufacturing sector raises wage inequality but lowers the unemployment of unskilled labour. So, the fall in import tariffs in manufacturing sectors has the opposite effect on wage inequality and the unemployment of unskilled labour. However, a fall in export subsidies raises both skilled and unskilled wage inequality and the unemployment of unskilled labour.

JEL Codes: F13, J31, O15