Journal of Development Economics 21 (1986) 327-346. North-Holland NEIGHBORHOOD EFFECTS OF DEVELOPING COIYNTRY PROTECTION Alan V. DEARDORFF and Robert M. STERN* The University of Michigan, Ann Arbor, MI 48109, USA Received April 1985, final version received September 1985 We examine how protection in LDCs affects welfare in other countries whose economic circumstances are similar. Theoretical analysis suggests the effects may be positive or negative. Analysis of data on protection in nine selected LDCs showed positive correlations among patterns of protection and trade, but a tendency for greater protection against the exports of other LDCs than against developed countries. To evaluate the general equilibrium economic effects involved, we used the Michigan Computational Model of World Production and Trade. The results showed positive terms-of-trade effects on other countries within the LDC sample group and negative effects for may DCs. However, the terms-of-trade improvement was very small and cannot be expected to outweigh the efficiency losses of protection within the LDCs themselves. 1. Introduction Analyses of tariffs and other forms of protection have focused mainly on their effects on the protecting country. In two-country models there has been some attention to effects on the other country, but this is equivalent to looking at effects on the rest of the world as a whole. Except in the customs union literature where the issues in any case are different, there has been little attention to the effects that a country's protection may have on individual foreign countries that make up only a part of the rest of the world. In this paper we address this issue, looking specifically at the effects that levels of protection in developing countries may have on other countries in their economic 'neighborhood' - that is, countries whose economic circumstances are similar to their own. The issue is potentially of great importance, The successes of some developing countries in recent years, together with the overall growth of populations even in the less successful ones, have expanded their importance *The research underlying this paper was supported by grants from the Bureau of Inter- national Labor Affairs of the U.S. Department of Labor and the Ford Foundation. We are grateful to Deborah Laren and Malcolm Robinson for computational assistance. 0304-3878/86/$3.50 © 1986, Elsevier Science Publishers B.V. (North-Holland)