PHASING IN AND PHASING OUT PROTECTIONISM WITH COSTLY ADJUSTMENT OF LABOR

We study the dynamics of optimal trade policy in a model with costly i nter-sectoral adjustment of labour, where migrants pay less than the m arginal social cost of migration. If workers have rational expectation s, a future tariff has an announcement effect on the current migration decision. If the government is able to commit itself to future policy , the optimal trajectory involves phasing in and then phasing out prot ection of the dying sector. This contrasts with recommendations of gra dual liberalisation. Without the ability to make commitments, the equi librium policy begins with and maintains free trade.