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On the Equivalence of Tariffs and Quotas for Customs Unions

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  • Hansen, Jørgen Drud

    ()
    (Department of Business and Economics)

  • Sala, Davide

    ()
    (Department of Business and Economics)

Abstract

While quotas can be expressed in tariff-equivalent terms and have identical economic effects under some conditions, they do not share the same welfare implications with tariffs in the presence of a piecemeal reform (second-best). In this paper we show that this non-welfare equivalence persists in perfect competition when countries undergo regional integration. A Pareto improving customs union is nevertheless viable in both protection regimes, but it requires different trade policy adjustments. When we extend the analysis beyond the competitive framework and consider shocks to the economy or imperfect markets, this general desirability of unions is unfortunately lost. But we show that, interestingly, the equivalence between tariff and quota regimes can still arise under particular circumstances, and only quotas provide countries with full insurance from price fluctuations.

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Bibliographic Info

Paper provided by Department of Business and Economics, University of Southern Denmark in its series Discussion Papers of Business and Economics with number 11/2013.

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Length: 31 pages
Date of creation: 13 Aug 2013
Date of revision:
Handle: RePEc:hhs:sdueko:2013_011

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Postal: Department of Business and Economics, University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark
Phone: 65 50 32 33
Fax: 65 50 32 37
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Web page: http://www.sdu.dk/ivoe
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Keywords: Equivalence; tariffs and quotas; customs union;

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  1. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, American Economic Association, vol. 89(1), pages 215-248, March.
  2. Corden, W. Max & Falvey, Rodney E., 1985. "Quotas and the second best," Economics Letters, Elsevier, Elsevier, vol. 18(1), pages 67-70.
  3. Kemp, Murray C. & Wan, Henry Jr., 1976. "An elementary proposition concerning the formation of customs unions," Journal of International Economics, Elsevier, Elsevier, vol. 6(1), pages 95-97, February.
  4. Falvey, Rodney E., 1988. "Tariffs, quotas and piecemeal policy reform," Journal of International Economics, Elsevier, Elsevier, vol. 25(1-2), pages 177-183, August.
  5. Panagariya, Arvind & Krishna, Pravin, 2002. "On necessarily welfare-enhancing free trade areas," Journal of International Economics, Elsevier, Elsevier, vol. 57(2), pages 353-367, August.
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