Tariffs has been one of the major revenue sources of governments in many countries. So it's no surprise that in this age of increasing globalization and trade liberalization, one of the reasons for trade protectionist policies is the loss of revenue source for the government. So unless the government can find alternative sources of revenue, trade liberalization may be a slow process in these countries.
Well, Thomas Baunsgaard and Michael Keen have managed to keep track of how countries have fared in finding alternative sources of revenue (specifically domestic taxes), now that these countries are opening up to international trade. Their finding:
"For high income countries, the answer is clearly ‘yes.’ For middle income countries, there are robust signs of strong replacement both concurrently with the revenue loss and—essentially dollar-for-dollar—in the long run. Signs of significant recovery by low income countries are flimsier, however, and their experiences appear to have varied widely."
It's no surprise, rich and middle-income countries can easily recover tariff revenues from domestic taxes. It may also be the case that there is a secondary effect which help recover loss of tariff revenue from domestic taxes: it has already been empirically proven that trade liberalization contributes to economic development. And considering tax revenues is pro-cyclical, such trade liberalization can improve tax revenues. And so the process becomes endogenous.
For low-income countries, the different results is also expected. Baunsgaard and Keen points out that the results are varied and in many cases are incomplete. Still, for them, even with incomplete consensus, the loss of revenue for these governments still do not give reason to deny the benefits of trade liberalization.
I may have to agree. Again, it depends on many things, institutions and rule of law among them, and the channel of trade liberalization and economic growth may be different. So this is one area that need to be explored. What is the general equilibrium effects of trade liberalization to economic development in low income countries? Because it seems, trade liberalization may not be for smaller countries with weaker institutions.