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.     

A General Equilibrium Approach to the Nonequivalence of Tariffs and Quotas under International Duopoly

We examine the nonequivalence of tariffs and quotas under international duopoly in a simple general equilibrium trading model; in particular, we study the welfare effects of a change in regime from a tariff to a quota. We first show that the results established by our predecessors in a partial-equilibrium segmented domestic market model do not straightforwardly carry over to a general equilibrium context. We next extend the segmented domestic market model to an integrated world market model and re-examine the equivalence of tariffs and quotas as well as the welfare aspects of the change in the regime.     

Simultaneous Reform of Tariffs and Quotas

This paper presents a general result for simultaneous reform of tariffs and quotas in a small open economy, where some of the quota rents do not accrue to domestic residents. Absent highly perverse income effects, welfare must rise following a uniform proportionate reduction in tariffs and a uniform proportionate relaxation of quotas, weighted by their rent‐retention parameters. Previous results are shown to be special cases of this one, and its implications for practical policy advice and its relationship with the policy of “tariffication” of quotas are discussed.     

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 Nonequivalence of Import and Export Quotas in Strategic Equilibrium

The authors use a standard general‐equilibrium trade model to show that export and import policies are not symmetric in the equilibrium of a strategic game with quotas. It is assumed that N (identical) large countries, without cooperation, set their import (or export) quotas to maximize domestic welfare. It is shown that the equilibrium in which all countries use import quotas differs from, and is superior to, the equilibrium in which countries use export quotas. The difference arises because the elasticity of the residual foreign export supply schedule differs between the two equilibria. The authors also study the properties of the sequential equilibrium of the game. In a simultaneous‐move game, each country is indifferent as to whether it uses an import or export quota, given the policy of the other country. However, in a sequential‐move game, the first mover will prefer to use an import quota rather than an export quota.     

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.     

Trade Reform Diagnostics with Many Households, Quotas, and Tariffs

Revenue-neutral trade reform is desirable if revenues are made up from less costly distortions. With a particular computable general-equilibrium model, reforms can be evaluated, but the robustness of conclusions is suspect; they depend on a particular specification and parameterization of the model economy. This paper provides a diagnostic toolkit which permits sensitivity analysis across model specifications and parameterizations, notably allowing for heterogeneous households. Novel elements include emphasis on the concept of compensated marginal cost of funds (MCF) necessary to sensitivity analysis, development of the MCF of quotas, and analysis of the relationship between aggregate MCF and social welfare.     

Tariffs,Quotas, and Forward Contracts under Asymmetric Information*

We consider optimal trade policy for a large country with private information. We show that the optimal tariff leads to a signaling equilibrium with higher tariffs and lower welfare than under complete information, whereas the optimal import quota replicates the complete information equilibrium and thus is superior to the tariff. We also show that, with the tariff, the country may be better off being uninformed. Finally, we show that if the importing nation cannot commit to its tariff, the use of futures contracts together with the dynamically consistent tariff leads to the same equilibrium as under complete information with commitment.     

Tariffs vs Quotas in a Model of Trade with Capital Accumulation*

This paper examines the equivalence among price‐modifying and quantity‐fixing international trade policies in a differential game. We employ two well‐known capital accumulation dynamics for firms, due to Nerlove and Arrow and to Ramsey, respectively. We show that, in both cases, open‐loop and closed‐loop Nash equilibria coincide. Under the former accumulation the tariff‐quota equivalence holds, while, in general, it does not under the latter. Moreover, in the Ramsey model, the country setting the trade policy (weakly) prefers a quantity‐equivalent import quota to the adoption of the tariff. These results are not a consequence of the equilibrium concept we adopt (with and without market power), but directly follow from the interplay between market power and the properties of accumulation dynamics.     

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]     

Uncertainty and Production Quotas

This paper examines the role of uncertainty in determining the impact of production quotas on a risk-neutral producer's behaviour
In the context of production uncertainty the introduction of a quota will lead to a reduction in planned production. Moreover, in a situation of an established quota, the level of planned production relative to the quota depends both on the size of the profit margin on quota production and on the extent of production uncertainty. Apart from these direct influences, uncertainty influences planned production indirectly in a situation where over-quota production can be sold in an uncertain export market. The direction of this influence depends on the relationship between the producer's uncertainties of price and production. It is argued, therefore, that the welfare assessment of the impact of production quotas must incorporate the role of uncertainty.     

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.     

Quotas and the second best

This note makes two observations about trade restrictions on subgroups of commodities. First, unlike tariffs, unalterable quotas provide no second-best justification for general restrictions. Second, the optimal allocation of intra-subgroup trade depends on the form of restraint imposed.     

Embodied Carbon Tariffs

In this paper, we investigate the economic and environmental impacts of tariffs on carbon embodied in trade. We find that carbon tariffs do reduce foreign emissions, but their ability to improve global cost‐effectiveness of unilateral climate policy is quite limited – even if tariff rates are based on more sophisticated second‐best considerations. If carbon tariffs are levied on the full carbon content of traded goods, they can even increase rather than decrease the global cost of emission reduction. The main effect of carbon tariffs is to shift the economic burden of developed‐world climate policies to the developing world.     

Import Quotas and Entry Deterrence

Using a simple version of the Milgrom and Roberts entry deterrence model, it is shown that adjusting a quota so that a greater volume of imports is allowed, can facilitate entry into the domestic industry. That is, the easing of a quota, can cause the domestic incumbent to shift from deterring entry to accommodating entry.     

On the Equivalence of Ad Valorem Tariffs and Specific Tariffs under Duopoly*

Using a quantity conjectural variation model, this paper examines whether an ad valorem tariff and a specific tariff are equivalent under duopoly. We show that if the average per‐unit import tax is the same for the two tariffs, domestic output will be smaller while foreign output will be larger under an ad valorem tariff. We further show that for any value of a specific tariff, there is a Pareto‐superior ad valorem tariff for all values of conjectural variation except in the case of perfect competition where the two tariffs are equivalent.     

Stable Tariffs and Retaliations*

A two‐country, two‐commodity model of trade is considered to reformulate the tariff retaliations. It is known that tariff retaliations lead to a Nash‐equilibrium, a non‐free‐trade outcome. However, the negotiation process underlying the Nash equilibrium does not capture the notion of retaliation properly. We use the “contingent threat situation” to reformulate tariff retaliations. In this context, we show that the free trade is a stable outcome. More surprisingly, this interesting result is also valid for the “Johnson case,” where one country is better off under the tariff‐ridden Nash equilibrium compared to free trade.     

Market Share Quotas and Community Reinvestment

This notes explores some theoretical implications of the U.S. Department of Justice's policy requiring lenders to seek as much market share in protected neighborhoods as elsewhere. In the asymmetric Cournot case, the high-cost lender in the protected neighborhood responds in the expected way, but the low-cost lender's response depends on the curvature of the demand function. For concave demand, the low-cost lender's output decisions run counter to those of the high-cost lender, undermining the policy's effectiveness and inefficiently shifting production in the protected market from the low-cost provider to the high-cost provider.     

Foreign Factor Ownership and Optimal Tariffs

In the presence of foreign factor ownership tariffs change not only the terms of (goods) trade but also income flows between countries. Assume that only the home country owns factors abroad. Then the optimal tariff is negative if and only if foreign factor ownership entails trade-pattern reversals. Trade-pattern reversals are neither a necessary nor a sufficient condition for a negative optimal tariff if the foreign country owns factors in the home country. Changes in the home country's tariff shift the foreign country's offer curve. This adds a new dimension to optimal tariff analysis.