Publication Date


Series Number

90-GATT 24


The current round of negotiations of the General Agreement on Trade and Tariffs (GATT) represents a major initiative of economic reform. Initiatives for trade reform are far from new. A facilitative framework has been proposed that ranks policies according to their level of price distortion—the least distorting policies are favored over the more distorting. Policies that are regarded as highly distortionary are termed "red light policies"; those policies that are least distortionary and, therefore, most acceptable from an international prospective are "green light policies"; "yellow light policies" fall between these two extremes. This policy ranking scheme, at least in theory, is based on the degree of trade distortion each policy creates (Rausser and Nielson, 1990). In addition to the degree of trade distortion, the political sustainability of the reform policy should influence the ranking (Rausser and Irwin) 1989); a reform policy that is likely to be sustainable is more desirable than an equally distortionary policy that is not likely to be sustainable. We show that policies that promote diversification of ownership and mobility of the factors of production can reduce the incentive of agents to seek protectionist trade policies. Therefore, we argue that all use the same policies that promote the mobility of factors, and the diversification of ownership of immobile factors should be ranked above those that do not.

Copyright Owner

Iowa State University