Lobbying for tari¤s: An analysis of the interaction between domestic policy and trade policy

In this paper I consider how the structure of domestic tax policy can a¤ect trade policy when the former is determined through voting by the public and the latter through lobbying by …rms. I …nd that in these circumstances trade policy may be more liberal due to the pressures placed on the lobbying capabilities of …rms by the use of domestic taxes. In particular a domestic income tax reduces the extra pro…ts available to domestic …rms through restrictions on trade, thus reducing the demand for trade protection. There are also e¤ects in the opposite direction as tari¤s a¤ect the demand for the publically provided good and thus the policy platform of the political parties. This paper covers new ground in that the interactions between policies on the political economy demand side have previously received little attention. The supply side of the political economy of trade policy has perhaps been more rigorously covered. For example the idea that introducing an electorally unpopular trade policy will only make sense for a government seeking to gain/keep power if they receive some bene…t, for example in campaign contributions (as in this paper) is now common. The idea that similar tradeo¤s exist on the demand side and the interaction this has with the supply side remains relatively unexplored however.