The Arbitrage Lobby: Theory and Evidence on Dual Exchange Rates

Foundational theories of trade politics emphasize a conflict between consumer welfare and protectionist lobbies. But these theories ignore other powerful lobbies that also shape trade policy. We propose a theory of trade distortion arising from conflict between consumer welfare and importer lobbies. We estimate the key parameter of the model-the government's weight on welfare-using original data from Venezuela, where Hugo Chavez used an exchange-rate subsidy to underwrite hundreds of billions of dollars of imports. Whereas estimates from traditional models would make Chavez look like a welfare maximizer, our results indicate that he implemented distortionary commercial policy to the benefit of special interests. Our analysis underscores the importance of tailoring workhorse models to account for differences in interest group configuration. The politics of trade policy is not reducible to the politics of protectionism.