Natural Barriers and Policy Barriers

This paper investigates whether “natural” trade barriers of a country due to geography and other factors outside the country’s control stimulate more or less policy barriers such as tariffs. Our theory predicts that the politician’s relative weight on private benefits over social welfare in a “protection-for-sale” setup depends on these “natural” features. The key mechanism is that a society’s willingness to invest in improving institutions that constrain rent-seeking behavior is influenced by the natural barriers. Two types of empirical evidence support the theoretical predictions. First, we show that “natural” barriers beget policy barriers - countries with more “natural” barriers tend to have higher tariffs and more NTBs. Second, we show that liberalization begets liberalization - in response to unilateral trade reforms in China in the early 2000s, those other countries whose geography and comparative advantage allow them to benefit more from the Chinese liberalization also undertake more liberalization of their own in a way that is consistent with the theory.