Recent Developments in Multilateral Policy Reform

Abstract

Theoretical work on the reform of tariffs and quantity restrictions on trade has been focused on deriving recommendations for Pareto improving changes in policy, as in the optimal (closed economy) tax reform literature (e.g. Diewert 1978). There has been an emphasis on coming up with simple answers to practical policy questions (Which way is up?) and checkable evaluation criteria for policy reform proposals. The literature on tariff and quota reform can be divided into two subsets: the first deals with policy reform in a single, usually small, country (unilateral policy reform) and the second considers reforms in a many country world (multilateral policy reform). On unilateral policy reform concerning tariffs, we refer the reader to Foster and Sonnenschein (1970), Bertrand and Vanek (1971), Hatta (1977), Smith (1980), Diewert, TurunenRed and Woodland (1989, 1991) and Vousden (1990, Ch. 9); and concerning quotas to Falvey (1988), Anderson and Neary (1992), Neary (1995) and Vousden (1990, Ch. 9). Two broad policy conclusions emerge from this literature. Under various assumptions, proportional reductions of all tariffs and reductions of extreme ad valorem tariffs can be welfare improving. Also, for unilateral changes, relaxations of binding quotas (with no tariffs) and relaxations of quotas with extreme quota premia (when tariffs are present and goods are net substitutes) can produce welfare gains. The second and smaller subset of the international trade literature deals with multilateral changes. Early contributions extend the broad policy conclusions of the unilateral literature to a many country world, but suffer from stringent assumptions such as requirements that all commodities should be net substitutes or that all goods should be normal. Turunen-Red and Woodland (1991) offer a generalization of the unilateral rule for proportional tariff reforms (i.e., that in each country, tariffs should be altered proportionally to a vector of suitably defined shadow prices) and