Small Tariff Research Articles

Labour Rents, Adjustment Costs and the Cost of US Steel Trade Restraints in the 1980s

Recent studies have compared labour gains from protection in import-competing industries with the costs of protection and found that those gains are not large enough to justify trade restraints. This study utilizes a new empirical technique for estimating the costs and benefits of protection in a partial equilibrium framework, and provides a complete and consistent accounting of labour benefits including both labour rents and adjustment costs saved. We find that a small steel tariff could have generated net welfare gains for the US in the 1980s, even though actual protection through Voluntary Restraint Agreements generated net welfare losses.

Tariffs, Then and Now: Lecture in Honour of the Late Bert Kelly

While much of the Australian trade liberalisation for which Bert Kelly fought has been achieved, there are still areas of highly selective protection, particularly in textiles, clothing, footwear and passenger motor vehicles. An analysis is made of arguments for continued assistance which are advanced in some quarters: that Australia should not reduce its barriers unless other countries also do so and that we are ‘leading the pack’; that frontier barriers should not be reduced unless microeconomic reform in Australia is acccelerated; that because other countries may exclude automobiles from their APEC commitments, so should Australia; that small tariffs don’t matter; and that local pain overshadows national gain. Bert Kelly would have found many of the arguments all too familiar.

Why Free Trade May Hurt Developing Countries

This paper builds a general equilibrium trade model where a country produces two traded goods and one nontraded public consumption good. The government finances the provision of the public good by taxing the incomes of factors of production, and/or by imposing tariffs. Within this framework, the paper (i) shows that a small tariff or an income tax improves the country’s welfare if there is an undersupply of public good, and (ii) identifies the circumstances in which an improvement in the country’s terms of trade may reduce its welfare, and free trade can be inferior to autarky. A terms of trade improvement, or the movement from autarky to free trade, definitely improves the country’s welfare if the government imposes a tariff that leaves the domestic relative price of the imported good unchanged.

PROTECTION AND REAL PORTFOLIO INCOMES: A STOLPER-SAMUELSON RELATIONSHIP FOR THE VERY SHORT RUN

Of the four basic theorems of CRS trade theory, only the Stolper-Samuelson theorem has an application to the very short run. On impact, a small tariff increases the disposable real income of a representative portfolio if and only if the protected sector is more capital intensive than average. This proposition applies regardless of the weight of the protected commodity in the consumption basket and regardless of the number of goods or factors. Copyright 1994 by Blackwell Publishers Ltd and The Victoria University of Manchester

"Once-off" and Continuing Gains from Trade

Most economists are familiar with the static or once-off welfare gains created by opening an economy to trade. Much less is known about how the resource reallocations necessitated by this move affect long-run growth, and hence whether they provide dynamic or continuing welfare gains in future periods. This paper employs a dynamic trade model to provide a decomposition of the gains from trade into once-off' and continuing categories. In one version of the model, trade is always welfare enhancing; in the other, once-off losses may occur alongside dynamic gains. In both versions the magnitude of once-off and continuing effects are related to absolute and relative country size, similarity in production structures, rates of time preference, and the productivity of RD moreover, I link the magnitude of these gains to absolute and relative country size, similarity in production structures, the productivity of R&D, and the strength of time preference. I address these questions within the growth model developed in Taylor (1991). The model is created by imbedding the one-factor Quality Ladders model of Grossman and Helpman (1991a) within the continuum model of Dornbusch, Fischer and Samuelson (1977).' Because of the model's features, comparative and absolute advantage play a leading role in determining the size of both once-off and continuing gains from trade. Because of the model's endogenous growth features, access to larger world markets and trade-induced specialization in spurs economic growth. I use two versions of the basic model to examine the positive and normative consequences of international trade. In the Footloose R&D version I show that free trade is always preferred to autarky because trade creates both an immediate and onceoff level rise in instantaneous utility and an increase in its long-run rate of growth. In the Traditional Ricardian version I show that immediate and once-off losses may occur, but provide conditions under which there is a strong presumption in favour of overall gains. Recent work in this area has only considered the welfare consequences of a marginal movement towards autarky from free trade via small tariffs (Grossman and Helpman

Tariffs, Investment and the Current Account

A dynamic specific-factors model with adjustment costs of investment is used to study the impact of tariffs on the current account. A permanent increase in tariffs generates a current account deficit, as the import-competing sector spreads the increase of the capital stock over time. A temporary increase in tariffs has ambiguous effects. If the size and duration of the tariff are large enough, a strong response in investment could outweigh the increased savings and the current account deteriorates. For small and short-lived tariffs, the postponement of investment reinforces that of consumption, leading to a current account surplus. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Derationalizing tariffs with specialized intermediate inputs and differentiated final goods

Existing analyses of differentiated products suggest that a small tariff must be welfare improving, as a positive terms-of-trade effect and an increase in the number of domestic varieties outweighs the loss of foreign varieties. This result appears to be due to an arbitrary assumption that the intra-sectoral elasticity of substitution in consumption exceeds the inter-sectoral elasticity. This paper demonstrates that complementarity among specialized inputs (or differentiated final goods) implies that a small tariff can derationalize production sufficiently such that the number of domestic inputs/goods falls and welfare is reduced.

Factor Intensity Conditions for Welfare-Improving Foreign Investment in Tariff-Distorted Economies: A Comment on Neary and Ruane

Earlier work in the foreign investment literature shows that the immiserizing effect of capital mobility in the presence of small tariff distortions is immune to capital intensity considerations. This is not so in the context of large tariffs. A capital intensity reversal is sufficient to rescue tariff-ridden economies from the usually damaging effects of capital mobility; on the other hand, a strengthening of the pre-tariff factor intensity pattern ensures that the small tariff/immiserizing capital flow results are robust in the large. Capital movements in the second-best optimum are also predicted. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Protection and the Optimal Tariff

A simple diagrammatic device, featuring the foreign offer curve and several alternative home income-consumption loci, is presented to illustrate those cases in which the Metzler tariff paradox may arise. In this paradoxical outcome, a tariff lowers the relative domestic price of importahles. It is shown thai the imposition of an optimal tariff may lead to such an outcome, even though the existence of an optima! tariff is often cited as a condition sufficient to rule out various paradoxes in trade theory, including the Metzler tariff paradox. The theory of international trade is noted for several paradoxical outcomes that may emerge when a trade equilibrium is disturbed from an initial, free-trade, competitive level: Growth in production possibilities in one country may so depress the country's terms of trade as to lower real income. In similar fashion a gift from abroad may, in a multi-country trading world, lower home welfare. And the imposition of a small tariff may lower the world price of imports sufficiently to cause the relative domestic price of imports to decline, the celebrated Metzler paradox. As argued by Bhagwati and others, paradoxes such as these can be avoided if a country levies an optimal tariff. Specifically, if such a tariff is in place, (i) growth at home or a gift from abroad must raise aggregate welfare, and (ii) a further rise in the tariff rate must serve to protect local import-competing industries. Thus the optimal tariff is associated with the absence of such paradoxical possibilities. However, such a broad conclusion still leaves open the question of whether the move from free trade to an optimal tariff must itself be protective, even though it is established that further increases in the tariff rate raise domestic import prices. The purpose of this note is to illustrate that the Metzler paradox may indeed emerge with an optimal tariff. Furthermore, the simple graphical construction used to illustrate this result focuses on the home country's income-consumption locus in a manner which reveals how the possibility * Department of Economics, University of Rochester, U.S.A. Research support has been provided by the National Science Foundation Grant #SES-851069F. This content downloaded from 40.77.167.15 on Sun, 28 Aug 2016 04:50:12 UTC All use subject to http://about.jstor.org/terms Journal of International Economic Integration of a Metzler tariff paradox is sensitive to the height of the tariff. A sufficiently high rate of protection can always serve to raise the relative price of imports behind the tariff wall. The argument is based on the accompanying offer curve diagram. I have assumed that the slope of ray OF depicts the initial terms of trade and that the foreign offer curve, OR* is inelastic at equilibrium point F. The diagram differs from those traditionally shown in that it is designed to represent three alternative taste patterns for the home country. They all share indifference curve y0 tangent to ray OF at the initial equilibrium, but differ in the values for the home marginal propensity to consume. Three alternative income-consumption curves are drawn, each corresponding to a different set of tastes. Thus the steepest curve, 1, is associated with a taste pattern heavily biased towards importables-a high value for m, the home marginal propensity to consume. Curve 3, by contrast, reflects a low marginal propensity to consume. With such a tast pattern indifference curves have the same slope as y0 at F everywhere along curve 3. An intermediate case is shown by income-consumption curve 2. Each income-consumption curve is associated with a different home offer curve, not drawn, with each offer curve passing through point F. This content downloaded from 40.77.167.15 on Sun, 28 Aug 2016 04:50:12 UTC All use subject to http://about.jstor.org/terms

A note on the protective effect of tariffs and quotas under uncertainty

Sufficient conditions are given for any tariff or quota to be protective under uncertainty, where assets are not traded internationally, and commodities are traded. It is shown that if both goods are normal goods, then any small tariff or quota is protective, even if it varies with the random state of nature. A sufficient condition is also given for large trade restrictions to be protective under uncertainty. These results thus generalize those of Helpman and Razin, who showed that when both goods are normal goods, a small ad valorem tariff which is independent of the state of nature is protective.

Industrial policy under monopolistic competition

We study the general equilibrium effects of tariffs, export subsidies, output subsidies and RD subsidies in a monopolistically competitive sector that produces differentiated products. Apart from allocative effects we examine the desirability of these policies from a welfare point of view. It is shown that a small tariff is welfare improving, but that the other instruments result in ambiguous welfare changes. The results depend on identifiable details of the production structure, the sectoral interlinkages through factor markets and preferences. These results are compared to other findings in the literature.

Cartel stability and tariff policy

In this paper we investigate the effect that tariff policy has on the ability of firms to collude in oligopolistic industries. We find that small tariff rates lead to an industry structure more conducive to collusive behavior, while large tariff rates weaken cartels. There exists a critical tariff rate which has no effect on the cartel's stability. This critical value is found to be a decreasing function of N, the number of firms in the industry, and N D N the proportion of firms that are domestic.

More on tariffs and non-traded goods

The general equilibrium effects of a small tariff on relative prices are analysed within a demand and supply model which provides further insights into Dornbusch's (1974) results. It is shown that the elasticity of the price of non-traded goods with respect to the tariff is a weighted average of the degree of substitutability between non-traded goods and importables on the supply side and that on the demand side. When complementarity is ruled out, the price of non-traded goods increases with the tariff, but less than proportionally.

The distribution of gains from bilateral tariff reductions

A two-good, two-country model is used to analyse the distribution of gains from proportionate, bilateral tariff reductions It is shown that the distribution of gains is given by the solution to a rather complicated quadratic equation which exhibits multiple real roots. The country with the more elastic offer surface will be the relative gainer, for example, if it has either a very large or a very small tariff relative to the other country's tariff and relative to its own ‘optimal’ (Nash-equilibrium) tariff.

Ranking of Tariffs Under Monopoly Power in Trade

In a recent paper in this Journal J. Bhagwati and M. C. Kemp considered the question of ranking tariffs in the presence of monopoly power in trade.' Under the assumption that the exportable goods in the tariff-imposing country were not inferior, the following proposition was established: the country could raise its welfare monotonically by raising tariffs up to a certain maximum (corresponding to the optimum tariff), and beyond this point a further tariff increase would monotonically reduce welfare to the point where protection was prohibitive. The demonstration was based on the implicit assumption that the foreign offer curve faced by the tariff-imposing country was well-behaved. This, however, need not be the case. Even if we assume (in the spirit of the Bhagwati-Kemp paper) that there are no internal commodity price distortions, factor price distortions, or imperfections in the redistribution of income, the foreign country may have a tariff. It then becomes possible, in the presence of inferior goods, for the foreign offer curve to yield multiple equilibria at given terms of trade. In this case it is easy to show that the Bhagwati-Kemp theorem no longer holds. Assume that the foreign country has a tariff and that its export good is strongly inferior. Then its offer curve will have all the properties described by Bhagwati and Kemp in their discussion of the tariff-imposing or country. This is illustrated in Figure I. With the home country's offer curve intersecting it from above in the backward-bending part of the curve, welfare will decline if a small tariff is imposed. As drawn, welfare continues to decline for tariffs up to a rate t, and then increases between the tariff rate t, and tariff rate t2 (while remaining below the free trade level). The welfare level then declines steadily for higher rates until at rate t, the tariff becomes just prohibitive. The corresponding tariff welfare curve is shown in Figure II. Note that, rather than impose