Ominous trends in America's international position and overall economic performance have generated increasing public dissatisfaction with the nation's laissez-faire approach to trade. Recent academic research has meanwhile cast new doubt on the theoretical case for free trade, especially where high-technology industries are concerned. As a consequence of these parallel developments, much of both academic and public debate over appropriate trade policy now centers on the practical implications of the modeling approach known as the new trade theory. Some look to the new theory for a better understanding of trade policy's potential role in improving overall economic performance; others seek theoretical justification of policies from which they themselves expect to benefit.
Trading relations have been changed during the 1970s as major industrialized countries have instituted preferential tariff schemes with developing countries in order to generate the transfer of resources. The effects of this concept, which operates as a form of assistance, have been analyzed in terms, not only of the standard customs union, but in the context of the political motives and domestic goals of the countries involved. Preferential access is examined as a potential trade-off, with emphasis on the role generalized and nonreciprocating preferences play in generating resource transfer to developing countries. The shift is seen as the result of the increasing cost of direct aid to developing countries as well as the desire of the developing countries to have more than one level of aid. 24 references. (DCK)
Traditional theory has usually condemned trade restriction as an irrational or misguided interference with efficient resource allocation. The two notable exceptions have been the optimum tariff and the infant industry argument for protection. More recently, however, trade theorists have begun to investigate the possibility that tariffs are used to achieve certain objectives, that is, ones reflecting considerations not captured by individual private consumption.' Their work has evaluated the relative efficiency of tariffs, production subsidies, and consumption taxes as instruments for implementing such objectives as a given increase in domestic production or restraint of imports below the free trade level.2 This note seeks to extend the analysis by comparing a tariff (or equivalent quota) with a commonly used protective arrangement which we term a distributed as alternative means of pursuing various objectives of trade restriction. We do not intend to de-emphasize the cost, even when minimized, of achieving certain objectives through protection. Rather, to the extent that these objectives are the end result of a process of political bargaining, they may be difficult to alter merely through demonstration of their welfare cost to the economy as a whole. Of course, calculation and promulgation of this cost makes it harder for special interest groups to obtain economic privileges at the expense of the majority. However, we should not overlook the possibility that certain noneconomic objectives are truly public goods which provide sufficient collective utility to the majority to justify their cost in terms of foregone consumption. In either case, it is desirable to provide the least-cost method of achieving the objective. For purposes of this paper, noneconomic can best be understood as outside the model. It is well known that any protective goal can be achieved through some combination of a consumption tax and a production subsidy. However, tariffs and quotas are employed much more frequently than direct subsidies probably for reasons of political feasibility. In this paper we use a familiar model to show that a proportionally distributed quota implies a smaller tax and larger subsidy than a tariff or conventional quota, and thus provides a more economically efficient-but equally practical-means of achieving some objectives. As long as markets remain competitive, import quotas distributed in most of the usual ways' are analytically equivalent to tariffs, since they will acquire a premium value in the market reflecting the domestic scarcity of the importable good.4 The only difference is in the distribution of the proceeds. In fact, the import licenses can be auctioned to the public, in which case (assuming again that markets remain competitive and in particular that the supply of licenses is not monopolized) the distribution of the proceeds is also equivalent, since the auction should yield the same revenue as would be produced by a tariff. We designate this type of restriction below as a tariff/quota. In contrast, the proportionally distributed quota is a system in which import rights are assigned to producers or consumers in proportion to their individual production or consumption of the restricted good. We show below that which group receives the licenses is irrelevant to the resulting equilibrium, for a given objective of protection (again, markets remnaining competitive). This is analogous to the fact that the economic incidence
A three-factor model of a small country or region is used to analyze the general equilibrium consequences of three frequently advocated regional development policies--investment subsidies, migration incentives, and educational expenditures. The analysis focuses on policy-induced changes in absolute and relative factor earnings. The results link changes in the distribution of income to the degree of complementarity and substitutability among factors of production and to the pricing scheme adopted by educational institutions. Programs intended to aid lagging regions may produce perverse results, particularly if the cost of education is the same to all individuals regardless of ability.
A three-factor model of a small country or region is used to analyze the general equilibrium consequences of three frequently advocated regional development policies--investment subsidies, migration incentives, and educational expenditures. The analysis focuses on policy-induced changes in absolute and relative factor earnings. The results link changes in the distribution of income to the degree of complementarity and substitutability among factors of production and to the pricing scheme adopted by educational institutions. Programs intended to aid lagging regions may produce perverse results, particularly if the cost of education is the same to all individuals regardless of ability.
Floating, Fixed, or Super-Fixed? Dollarization Joins the Menu of Exchange-Rate Options by Blake LeBaron and Rachel McCulloch. Published in volume 90, issue 2, pages 32-37 of American Economic Review, May 2000