The literature on the political economy of trade policy reveals that protection is typically granted to industries with large and underprivileged workforces which have suffered deterioration in international competitiveness, which are geographically concentrated, and which are represented by lobbies of labour and capital in political coalition. These stylized facts are inadequately treated in trade theory and endogenous protection models. Labour is generally assumed to be perfectly mobile, with the presumption that all workers benefit from an improvement in the terms of trade. To reconcile the stylized facts with theory, the specific-factors trade model is extended to incorporate two types of labour relocation cost. (i) Fixed costs, incurred either through the loss of sector-specific human capital or the absorption of real resources by labour relocation, do not easily explain the coexistence of structural adjustment and persistent demands for protection by labour groups in import-competing industries. Comparative statics results and numerical simulations suggest that under neutral conditions a rising world price of exports will benefit labour everywhere, as long as relocation costs are not very large. (ii) A further model examines the effect of a rise in the export price on regionally agglomerated industries, inducing an increasing relocation cost made endogenous to the volume of the labour flow through the operation of markets for residential land and changing costs of commuting. An export price rise can lead to an absolute fall in labour welfare in the declining sector, even while labour is mobile. Numerical simulations show that this result is robust for a range of commuting cost and technology parameter values, reconciling the reviewed stylized facts with received trade theory and forming the basis for policy suggestions and for extending an existing endogenous tariff model. Income redistribution can be effected by population density re-zoning, and first-best policy can be duplicated by relocation and production subsidies in combination. Labour incentives to demand protection are used in a voting model with costly voting to generate a tariff which hurts the majority of agents.
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