An Empirical Investigation of the Ratchet Effect in the OECD, 1985–2009

This paper employs a reduced form structuralist model of inflation in the OECD over the period 1985–2009 to find out whether domestic prices respond symmetrically to rising and falling import prices. We find that the response is asymmetrical: domestic prices rise when import prices rise but they do not fall when import prices fall. Our finding thus confirms the presence of a ratchet effect in the sample countries during the sample period, and implies that factors – such as exchange rate fluctuations and movements in tariff rates – that influence import prices tend to be inflationary.     

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.     

Passthrough of Exchange Rate and Tariffs into Import Prices of India: Currency Depreciation versus Import Liberalization*

This paper examines the extent of passthrough of exchange rate and tariff changes into import prices using sectoral panel data (at the two‐digit SITC level) for the post‐reform period in India (1990–2001). After having controlled for unobserved effects that might have an impact on the import prices by using sector dummies, we find that on average exchange rate passthrough (ERPT) is a dominant effect compared to tariff rate passthrough (TRPT) in explaining changes in India's import prices. The sectoral panel results suggest that the passthrough of exchange rates and tariff rates varies across products. ERPT into import prices is significant in 12 industries, whereas TRPT is significant only in six industries, with full passthrough. However, ERPT is incomplete only in four industries, but TRPT is incomplete in 36 industries, which means that firms exporting to India more frequently adopt strategies to maintain their market share against tariffs than against exchange rate changes. The sectoral differences in passthrough seem to be related to the sector's share in total imports and the sector's effective protection rate. Hence, India's relatively high levels of protection have an impact on the behavior of foreign exporters.     

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]     

Effects of the Mexican Apple Tariff on the World Apple Market

In response to the USA blocking Mexican trucks from traveling to the inland part of the USA, Mexico imposed tariffs on US fresh apple exports. This study analyzes the impacts of the Mexican tariff on USA, Mexican and world apple markets by using theoretical analysis and developing a spatial equilibrium trade model. The results show that this tariff increases apple prices in Mexico, to the benefit of Mexican producers but harming Mexican consumers. Even though Mexico collects revenues from its tariff, the overall welfare impact is negative because consumers' loss outweighs producers' gain and tariff revenues. Since the USA exports less to Mexico, its prices and production decline, but consumption increases. To mitigate the export market loss to Mexico, the USA redirects its exports to other importing countries, displacing other apple exporting countries' trade with these importing countries.     

WELFARE COST OF AN OIL IMPORT FEE

This paper examines the impacts on the US. oil market of a $5-per-barrel tariff on imported crude oil. The analysis shows that the United States currently is a price taker in the world oil market. This means that "optimal tariff" arguments for an oil import fee have no validity. The author also argues that any economic losses that oil supply disruptions generate are better addressed with alternative policy tools. To forecast the effects of the tariff on US. production, the author uses a domestic oil supply model that she developed elsewhere. She calculates the resulting gains in producer surplus and then combines them with an estimate of consumer surplus losses and government revenues so as to yield an estimate of the tariff's welfare cost. This welfare cost amounts to approximately $17 billion (in present-value terms) over the 1988–1998 period.     

Welfare‐improving Coordinated Tariff and Sales Tax Reforms under Imperfect Competition

This paper studies the welfare effects of coordinated domestic sales tax reform associated with a reduction of the import tariff under imperfect competition. We set up a simple oligopoly trading model where domestic and exporting firms compete in the home market. We show that, if the initial levels of import tariff and sales tax are positive, there always exist welfare‐improving sales tax reforms. In some cases, a reduction of the sales tax accompanied by a reduction of the import tariff increases social welfare, whereas in other cases, raising the sales tax can increase social welfare.     

Dynamics of economic efficiency in tariff and trade

When the efficiency losses or gains as a result of an ad valorem import tariff are accounted for, the exisiting literature compares the equilibrium states before and after the tariff. However, after the imposition of an ad valorem tariff, the cost of the foreign producer to sell in the domestic market jumps upwards by the extent of the ad valorem tariff. This affects the quantity of imports, and the market is no longer in the initial equilibrium. The market then adjusts and after some efficiency loss, a new equilibrium state is arrived at. The mechanism of price adjustment has a basis of lack of coordination among buyers and sellers at the exisiting prices. The economic efficiency loss when the market is out of equilibrium is not taken into consideration in the literature, while deriving an optimal ad valorem tariff rate. In this article, an optimal ad valorem tariff schedule has been derived. From optimality, it should be construed that the economic efficiency losses get minimised when the market is adjusting and also during the equilibrium. A revenue constraint has to be met in addition.     

Pricing in Australian Manufacturing*

The rate of change of prices of competing foreign products and the rate of change of costs of domestic production are both found to have positive impact on the rate of domestic price inflation in a cross section of Australian manufacturing industries over the period from 1968-69 to 1986-87. Prices of competing foreign products are found to have more impact, while production costs are found to have less impact, the higher is the level of domestic concentration, supporting the hypothesis that foreign and domestic competition have interactive effects on domestic prices.     

Food Aid Disincentives: the Tunisian Experience

An econometric model is used to assess the short‐term (impact), interim, and cumulative effects of food aid on the economy of Tunisia for the period 1960–92. Food aid displaced neither domestic production nor commercial imports of food grains. Rather, food aid provided incentives to promote growth through its income and policy effects. Food aid provided increased public revenue that enabled the government to take an active role in domestic pricing, preventing disincentive prices and promoting domestic production. The results indicate a positive role for food aid when disincentive effects are managed through public policies.     

The price effect of tariff liberalization: Measuring the impact on household welfare

Trade policy literature has for many years emphasized open policies positive impact on economic growth and development. While these results generally hold when measured on averages, empirical evidence suggests that trade liberalization is unlikely to produce beneficial results across all households. This study adds to the literature by providing an analysis of the distributive effects of tariff liberalization in Mexico. The paper examines the effect of tariff liberalization from the perspective of households both as consumers and factor owners allowing for imperfect domestic price transmission. The results indicate the overall positive effect of tariff liberalization masks significant differences in the distribution of gains both across income levels and across geographic regions. Richer households are found to have gained relatively more. Urban areas, as well as Mexican states closest to the United States border, are also found to be larger beneficiaries while southernmost states have been largely bypassed by the effects of tariff liberalization. Those results can be explained not only in relation to the different endowments of the households, but also by the diverse effects on local prices that has resulted from Mexican trade liberalization.     

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.     

The Effects of Trade Liberalization On Cost-Reducing Horizontal Mergers*

This paper analyzes the effects of tariff reductions on horizontal mergers in a Cournot oligopoly in a two-country world. It is shown that for mergers between two domestic firms and for cross-border mergers which supply both markets from a foreign plant, unilateral tariff reduction encourages mergers which concentrate market power at the expense of mergers which reduce cost, while bilateral tariff reductions have the opposite effect, encouraging mergers which significantly reduce cost. Cross-border mergers which continue to supply each market from a local plant are discouraged by both unilateral and bilateral tariff reduction.     

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     

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.     

Policy reforms and asymmetric price transmission in the Zambian and Tanzanian coffee markets

Several governments in sub-Saharan Africa have embarked on various market reforms to improve commodity market performance. However, the success of such market reforms depends partly on the strength of the transmission of price signals between spatially separated markets and between different levels of commodity value chains. This study employs momentum threshold cointegration and error correction models to examine the impact of policy reforms on the transmission of prices between the world coffee market and domestic prices in Zambia and Tanzania. The findings show that in the case of Zambia, where policy reforms liberalized coffee markets, the producer prices respond more swiftly to decreases than increases in world market prices, and this swiftness increased after the policy reforms. For Tanzania, where reforms resulted in increased government intervention, producer prices were found to respond quicker to increases than decreases in world market prices over the period under consideration. However, the period before reforms showed domestic prices responding more swiftly to decreases than increases in world prices, while the post-reform period was characterized by faster responses to increases than decreases in world prices.     

Resource Rights and Markets in a General Equilibrium Model of Production

Rights to a free resource lead to distributional deadweight losses in partial equilibrium. The present paper examines related distortions in a general equilibrium model of production with output prices constant for the small open economy. The free resource can result in lower output than a market with weak substitution in the other sector. The free resource also leads to a convex production frontier implying a price increase lowers output in the sector. Regarding policy, an import tariff, export subsidy, or price support would lower sector output. These general equilibrium distortions increase the incentives to favor resource markets over rights.     

North–South asymmetry,unilateral environmental policy and carbon tariffs

This paper focuses on the potential impact of a carbon tariff on carbon emissions, North–South trade and welfare. We use a North–South trade model, where North implements a unilateral environmental policy on domestic carbon-intensive industries followed by a carbon tariff on imports from South. Unlike the existing studies, we allow asymmetry in clean production technologies and marginal environmental damage. We show that a carbon tariff can reduce the global carbon emission via the use of a more advanced clean production technology in North, which increases the firm profit and welfare. However, improvement in welfare of North is associated with a decrease in global trade flows and welfare of South. We find that, in the presence of asymmetry in clean production technologies between North and South, a carbon tariff introduced by the North can eliminate carbon leakage, but the exports of South decrease below the pre-unilateral environmental policy level and hence North can potentially use a carbon tariff for trade protectionism in the name of reducing carbon leakage in South.     

Fortress Europe: Jericho or Château d’If?

Traditional analysis of customs union formation suggests that it leads to an increase in members' external tariffs. This paper stresses two aspects of European trade and trade policy—a large volume of intra-industry trade between similar countries and a political motivation for tariffs—and highlights a role for tariff coordination in a model of differentiated products in which tariffs affect domestic costs and thus export prices and the magnitude of monopolistic rents. We show that when workers choose the tariffs and receive but a small portion of tariff revenues, the union's tariff wall falls.     

OPTIONAL REAL-TIME PRICING OF ELECTRICITY FOR INDUSTRIAL FIRMS

Abstract. This paper proposes a pricing mechanism, optional real-time pricing (RTP), with day-ahead hourly prices, that exploits the potential offered by a competitive wholesale power market. When an electric utility offers the option to its industrial customers, the retail prices are based on an existing Hopkinson tariff and expectations as to the wholesale market's next-day hourly spot prices. The proposed RTP mechanism is Pareto-superior to the tariff in that it assures both the utility and the customer of profits that will be at least as great as under the tariff.