Technological Upgrading under Tariffs and Equivalent Quotas*

This paper compares the effect of tariffs and that of equivalent quotas on the domestic firm’s production technology choice when it competes with a foreign firm in the domestic market. It is shown that under Bertrand price competition, the ranking of technology under tariff protection and quota protection is ambiguous, as it depends on the relative strength of the strategic vs output effects. The equivalent quota regime can generate a higher‐technology (implying a lower production cost) choice than the tariff regime if the strategic effect dominates the output effect. In contrast, the technology level is necessarily higher under the tariff regime than under the equivalent quota regime when the firms engage in Cournot quantity competition.     

On the Equivalence of Tariffs and Quotas under a Revenue Constraint

This paper sets out a duopolistic model to examine the price and welfare equivalence of tariffs and quotas, given the quota rent is equal to the tariff revenue. It shows that the domestic welfare ranking of the two trade policies crucially depends on the relative costs of the domestic and foreign firms; when the domestic firm's relative costs are lower than those of the foreign firm, a quota regime generally leads to a higher welfare level than that of an equivalent tariff regime. This finding contrasts sharply with the conclusions of Dasgupta and Stiglitz (1977 ), where it was found that a tariff regime always generates higher domestic welfare.     

Import sensitive products and perverse tariff‐rate quota liberalization

Abstract This paper shows that a Tariff‐Rate‐Quota's (TRQ) minimum access expansion can perversely trigger domestic price increases. Often, TRQs have prohibitive over‐quota tariffs to mimic import quotas in providing minimum market access. In the WTO's Doha Round, it is likely that countries using TRQs will avoid aggressive tariff reductions if they increase the quota portion of TRQs. We show that when the import price lies between the unit cost of production and the price received by domestic upstream firms, an increase in import quota as a share of domestic production may cause an increase in the domestic retail price.     

State Trading and Tariff Rate Quotas: The Case of Korea's Rice Imports

This paper analyzes the effects of trade liberalization of tariff‐rate quotas under import “state trading enterprises” (STEs) in agriculture. An analytical framework is provided to determine the importance of which instrument is binding under competition (the in‐quota or out‐of‐quota tariff or the quota) and under the initial STE equilibrium. It also depends on whether or not the STE controls both the domestic market prices and owns/controls the import quota (and whether it is obligated to fill the quota or not). An empirical example of the rice STE in South Korea has simulations showing that an increase in imports can be achieved through a moderate expansion of the quota or a decrease in the out‐of‐quota tariff to the level where it becomes binding. However, a significant level of quota expansion induces the STE to switch to the autarky solution and social welfare declines.     

Strategic trade policy under asymmetric information with screening

The design of strategic rent-extracting trade policies requires information that may be private, such as the cost structure of an industry or parameters of the demand function. As a consequence, under asymmetric information, the design of these policies is problematic. We propose screening menus consisting of different instruments (tariff vs. quota) designed to solve this informational issue. We first use a simple model that examines a Cournot duopoly between a domestic firm and a foreign firm with linear demand and cost functions, with both firms supplying a homogeneous good on the domestic market. In this scenario, if the government does not have information regarding the demand parameter, which is known by both firms, a menu consisting of a rent-extracting tariff for a low demand parameter and a rent-extracting quota for a high demand parameter maximizes the government's objective function. This menu leads the domestic firm to reveal private information. We then generalize this framework to a scenario with imperfect information regarding the firms' marginal cost. Finally, we discuss the issue of quotas generating public revenues and study the case of a menu consisting of a tariff and a free quota.     

Second-best trade policies in Cournot oligopoly

In this paper we study the optimal import policy in an oligopolistic market with a given number of quantity-setting firms. In the absence of fixed costs, we show that if the policy instrument is an import quota, the optimal policy is either free trade or autarky, while if the instrument is a tariff the optimal policy is neither free trade nor autarky. In the case of fixed costs, we show that contrary to the traditional protectionist argument, a restrictive import policy might increase domestic welfare by increasing domestic consumers' surplus, instead of increasing domestic profits.     

Quota-Induced Cycles

We present a new framework to compare the dynamic effect of tariffs and quotas in the presence of oligopoly. Suppose that the domestic and the foreign firm play a quantity-setting game over time in a perfectly stationary economy. A Markov-perfect equilibrium has the foreign firm exporting at the constant rate under a tariff. In contrast, under the quota the rate of exports changes monotonically over the course of each year, causing seasonal fluctuations in domestic production. Quota-induced cycles can make dynamic market segmentation possible and raise profits for both the firms above what they earn under the equal-import tariff.     

Hidden costs of supply management in a small market

Canada regulates its dairy and poultry industries through supply management. The supply‐management programs use target prices, production quotas and import tariff‐rate quotas to raise domestic prices. Canadian supply‐managed producers cannot export their output to world markets as exports would be considered subsidized under World Trade Organization rules. In this paper, we show that once foregone export opportunities are accounted for, supply management may no longer be beneficial to domestic producers of the supply‐managed commodities. The extent to which foregone profits from exports dominate domestic rents depends on Canada's comparative advantage, domestic market elasticities and the extent of supply management distortion in the domestic market.     

Variable Labor Supply,Terms of Trade Shocks,and Domestic Prices: A Note

This paper develops a two-good, small-country, general-equilibrium trade model with endogenous labor supply, where trade is restricted by a tariff or an import quota. Within this framework, it is shown that, contrary to Anam (1989), under an import quota domestic and world prices may vary in the same direction. This is due to the possibly positive employment effects of terms of trade shocks. In such a case, compared to fixed labor supply, variable labor supply is likely to make the domestic prices less sensitive to foreign price volatility. Received June 13, 2001; revised version received November 14, 2001     

Make vs buy in a monopoly with demand or cost uncertainty

The issue of technical progress under uncertainty is nested into the debate on vertical integration versus outsourcing, to show that, in general, the former is preferable to the latter in terms of both expected profits and technological efficiency. It is then shown that there exist (i) an optimal two part tariff where the unit price set by the upstream firm is conditional upon its R&D effort, and (ii) an optimal contract specifying the input price in terms of the initial capabilities of the sub-contractor, whereby the industry replicates the same performance as the vertically integrated firm as for both profits and R&D efforts.     

Smuggling and Bhagwati's Nonequivalence Between Tariffs and Quotas

The authors extend Professor Bhagwati's analysis about the nonequivalence between trade policy instruments when domestic production is monopolized and the terms of trade are endogenous, by allowing for smuggling. They show that the dominance of the ad valorem tariff over the quota is not robust. Tariffication can lower welfare even when the level of illegal imports is quite small. However, tariffication with a specific tariff is always beneficial because the specific tariff dominates the ad valorem tariff and the quota with or without smuggling. Smuggling (or the threat) also tends to lower the second–best tariff/quota, and increases welfare when imports are restricted by a quota, but lowers it under a tariff.     

大股东制衡、治理战略与信息披露-来自2003年中国上市公司的证据

麦敕勒(Metzler,1949)指出,对大国的进口行业征收关税可能会降低其国内相对价格,因而减少了它在经济中的产量份额。针对这一观点,本文发展了关于国民生产总值(GDP)转换对数函数系统的一个理论模型,并据此估计美国贸易政策对其行业产量份额的影响。通过采用美国及其经济合作与发展组织(OECD)贸易成员国的行业面板数据,并在控制要素禀赋和技术创新对行业产量份额的影响后,得出了在服装和玻璃行业呈现高关税导致低产量份额的经验证据。在控制了由贸易的政治经济因素导致的内生性及运用各类非关税壁垒代替关税作为测量行业保护的工具后,这些发现也同样稳健。因此,本文的贡献在一定程度上弥补了国际贸易中该领域实证研究方面的空白:证明了麦敕勒悖论理论不再只是一种可能性,而的确在服装业中存在。     

Tariff and Quota Equivalence in Vertically Related Markets

This paper re‐examines the issue of tariff and quota equivalence by introducing an upstream market into the Hwang and Mai (1988 ) model, and then allowing the two downstream firms to cross‐haul within each other's market. We assume the upstream monopolist can select either a two‐part or a one‐part tariff pricing strategy. It is found that if the upstream firm adopts a two‐part (one‐part) tariff pricing strategy, then the market price of the final good under a tariff will be higher (lower) than that under an equivalent quota; that is, the quota is set at the import level under the tariff regime. This result stands in stark contrast to the prior findings of both Hwang and Mai (1988 ) and Fung (1989 ). Moreover, if the quota rent is set as being equal to the tariff revenue, the social welfare under a tariff will necessarily be lower than that under an equivalent quota.     

The Nonequivalence of Tariffs and Quotas in a Dynamic Trade Model

The paper provides a novel (and old) argument for the nonequivalence of tariffs and quotas, based on the famous paper by Hotelling published in 1931. Unlike tariffs, quantitative restrictions are inherently dynamic. As long as the foreign exporter earns positive marginal profits, he raises their present value by frontloading sales. As a result, unlike a tariff, equilibrium with a quota exhibits quantity and price dispersion over time. The dispersion may be significant even with small discount rates.     

Tax Principles and Tariff‐Tax Reforms under International Oligopoly

In a two‐country duopoly model, this paper compares destination‐ and origin‐based commodity taxes adjusted to tariff reductions so that the world price and foreign welfare remain unaltered. We first find that this tariff‐tax reform reduces domestic welfare under the destination principle while the opposite holds under the origin principle. Then, it is shown that this ranking is reversed if exports are taxed. In short, which is preferable between destination and origin taxes depends on the tax principle and which between imports and exports are taxed.     

Capital Imports and Tariffs

This paper develops a three‐sector, three‐factor specific factor model with a tariff and presents conditions under which capital imports and tariffs can be welfare enhancing in a developing country. The impact on welfare depends on the tariff revenue effect and the repatriation effect. A capital import is welfare enhancing if it reduces the domestic output of imports. A tariff is welfare enhancing only if it reduces the return to foreign capital.     

Tariffs in a Ricardian Model with a Monopolistically Competitive Sector: the Role of Nontradables

It is shown that for a small open economy the welfare effects of a tariff on the import of the brands of a differentiated good depends crucially on the pattern of trade. The literature has shown that welfare rises when the domestic brands are nontraded. But when the domestic brands are traded, the imposition of a tariff lowers welfare by shifting demand towards the nontraded homogeneous good which causes exit from the differentiated goods industry.     

Tariffs Versus Quotas in a Differentiated Products Market: A Conjectural Variations in Prices Approach

This paper examines the (non)equivalence of a tariff and a quota set at the level of imports generated by the tariff using a conjectural variations in prices model. It extends previous studies by considering a variety of firm behavior patterns in the tariff equilibrium and when the imports and the domestic products are complements. The results obtained encompass most of the previous results. In addition, for complements, replacing a tariff with a quota has opposite effects on the prices of two products. Also, the prices under tariffs and quotas are not necessarily equivalent for complements. [F13]     

REAL BALANCES, RELATIVE PRICES AND AN OPEN MODEL TEMPORARY EQUILIBRIUM WITH RATIONING THE MARSHALL-LERNER CONDITIONS IN

The model is of an open economy producing a single output, the demand for which depends on its price, the price of foreign output, real incomes and government spending. We thereby extend the rationed equilibrium model of Malinvaud to the simplest open economy. Residents hold foreign assets as well as domestic assets, hence exchange rate movements have real balance effects as well as relative price effects. The Marshall Lerner conditions are sufficient, but not necessary, for either an exchange rate depreciation or a fall in the domestic price level, to increase demand for domestic output. They are necessary, but not sufficient, for a depreciation or fall in the domestic price level, to improve the trade balance under Keynesian Unemployment.     

The Effect of Quotas on Domestic Product Price and Quality

A quota on foreign competition generally leads to quality upgrading (downgrading) of the low-quality (high-quality) firm, an increase in average quality, a reduction of quality differentiation, and a reduction of domestic consumer surplus, irrespective of whether the foreign firm produces higher or lower quality. Effects of a quota on industry profits and domestic welfare depend on the direction of international vertical differentiation. If the foreign firm produces low quality, both firms prices and profits rise but domestic welfare falls. This describes well some major effects of a Japanese Voluntary Export Restraint (VER) in the U.S. auto market and relevant empirical findings. If the foreign firm produces high quality, foreign profits will fall. Since domestic consumer surplus falls only unsubstantially, domestic profit gains lead to an increase of domestic welfare.I am grateful to Jim Gaisford, and Konrad Stahl, seminar participants at the Universität Mannheim and at the ZEW, and an anonymous referee for useful comments and suggestions. As Senior Fellow at the Center for European Integration Studies (ZEI), Bonn, I gratefully acknowledge its continued support.