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YU Miaojie

This paper investigates a basic question about the international political economy—why is international trade not free? To answer this question, we modified Grossman and Helpman (1994) by considering that interest lobbies make political contributions to both the incumbent government and the political challenger in order to influence the incumbent government’s choice of trade policy. By examining the contribution schedules under a framework of bilateral direct investments, we find that the modified Ramsey rule still holds under our setting.

Series:

Xiaomin Cui and Miaojie Yu

Abstract

In the past thirty years, China has adopted a series of trade and investment promotion measures primarily focused on lowering import tariffs, establishing inter-regional free-trade agreements, signing bilateral investment agreements, opening up pilot free-trade zones, streamlining administration, delegating power, providing land and tax incentives, and strengthening infrastructure. These measures have increased enterprise productivity, improved consumer welfare, and stimulated China’s economic growth. With regard to China’s position in interregional free trade areas, pilot free trade zones and infrastructural development, there remains much room for future growth.