The Effects of Import Quotas on National Welfare: Does Money Matter?

Abstract

Recent evidence shows that there is an increasing use of non-tariff barriers to trade (NTBs), and especially of quantitative restrictions, such as import quotas, in the world economy to protect import-competing industries (see Table I).1 International trade theory, however, has traditionally focused on the welfare effects of tariffs as well as on the equivalence between tariffs and quotas, with little attention paid to the welfare implications of quotas. The latter have basically been restricted within the traditional Heckscher-Ohlin trade model, where, for the case of a small open economy, import quotas always reduce welfare. A few recent studies have attempted to fill in this gap in the literature. For instance, Young [19] compares optimal tariffs and quotas for a large country in a stochastic environment. Neary [14], on the other hand, investigates the welfare implications of tariffs, quotas and voluntary export restraints under different assumptions on capital mobility. Finally, Chao, Hwang and Yu [3; 4] examine the welfare effects of import quotas under variable returns to scale. Although the existing literature has generated important policy implications, most of the analysis has been conducted within a barter-exchange framework. It is well known, however, that the introduction of money can alter results obtained within a non-monetary environment.2 Accordingly, this paper attempts to re-examine the welfare effects of import quotas for a small monetary economy. We develop a two-sector trade model in which money enters the economy