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Domestic distortions and international trade

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  • Anderson, James E.
  • Neary, J. Peter

Abstract

Trade is affected not only by taxes and subsidies that affect producers and consumers of goods, but also, indirectly, by taxes and subsidies that affect nontraded goods or factors of production. The authors show how the Trade Restrictiveness Index (TRI) may be extended to incorporate these types of distortions. Again, the value of the TRI gives the equiproportionate change in the prices of traded goods, which would compensate for a given change in all distortions, both in traded and nontraded goods and in factor markets. The authors, who developed the theory of the TRI, show how to apply it in practice, drawing on a larger study by Anderson and Bannister of changes in Mexican agricultural policy between 1985 and 1989. Adapting the TRI to a partial equilibrium context allows existing estimates of key demand and supply elasticities to be incorporated into the Index; and the basic formula is adapted to take account of some special features of Mexican agricultural markets. The TRI shows a great increase in restrictiveness in 1986 and especially 1987, followed by major reductions in restrictiveness in 1988 and 1989. The cumulative effect: a 49.9 percent fall in trade restrictiveness over the four years. The major, although not the only, source of changes in trade restrictiveness were changes in producer subsidies, especially for maize. These trends are not captured by changes in indices for consumer and producer subsidy equivalents, which the authors also present. Indeed, in a number of years at least one of the ad hoc indices changed in the opposite direction to the change in the corresponding welfare-based index.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1163.

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Date of creation: 31 Jul 1993
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Handle: RePEc:wbk:wbrwps:1163

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Keywords: Access to Markets; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Markets and Market Access; Environmental Economics&Policies; Economic Theory&Research;

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References

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  1. Jones, Ronald W. & Peter Neary, J., 1984. "The positive theory of international trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 1, pages 1-62 Elsevier.
  2. Falvey, Rodney E., 1988. "Tariffs, quotas and piecemeal policy reform," Journal of International Economics, Elsevier, vol. 25(1-2), pages 177-183, August.
  3. Neary, J Peter, 1989. "Trade Liberalization and Shadow Prices in the Presence of Tariffs and Quotas," CEPR Discussion Papers 345, C.E.P.R. Discussion Papers.
  4. Anderson, James E & Neary, J Peter, 1996. "A New Approach to Evaluating Trade Policy," Review of Economic Studies, Wiley Blackwell, vol. 63(1), pages 107-25, January.
  5. Lloyd, P. J., 1974. "A more general theory of price distortions in open economies," Journal of International Economics, Elsevier, vol. 4(4), pages 365-386, November.
  6. Bertrand, Trent J & Vanek, Jaroslav, 1971. "The Theory of Tariffs, Taxes, and Subsidies: Some Aspects of the Second Best," American Economic Review, American Economic Association, vol. 61(5), pages 925-31, December.
  7. James E. Anderson, 1993. "Tariff Index Theory," Boston College Working Papers in Economics 215, Boston College Department of Economics.
  8. Magee, Stephen P, 1973. "Factor Market Distortions, Production, and Trade: A Survey," Oxford Economic Papers, Oxford University Press, vol. 25(1), pages 1-43, March.
  9. Diewert, W. E., 1985. "A dynamic approach to the measurement of waste in an open economy," Journal of International Economics, Elsevier, vol. 19(3-4), pages 213-240, November.
  10. Hatta, Tatsuo, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 1-21, February.
  11. Deaton, Angus, 1979. "The Distance Function in Consumer Behaviour with Applications to Index Numbers and Optimal Taxation," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 391-405, July.
  12. Corden, W. Max & Falvey, Rodney E., 1985. "Quotas and the second best," Economics Letters, Elsevier, vol. 18(1), pages 67-70.
  13. Anderson, James E. & Bannister, Geoffrey, 1992. "The trade restrictiveness index : an application to Mexican agriculture," Policy Research Working Paper Series 874, The World Bank.
  14. Neary, J Peter, 1978. "Dynamic Stability and the Theory of Factor-Market Distortions," American Economic Review, American Economic Association, vol. 68(4), pages 671-82, September.
  15. Peter Neary, 1988. "Tariffs, Quotas, and Voluntary Export Restraints with and without Internationally Mobile Capital," Canadian Journal of Economics, Canadian Economics Association, vol. 21(4), pages 714-35, November.
  16. Bruno, Michael, 1972. "Market Distortions and Gradual Reform," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 373-83, July.
  17. Jones, Ronald W, 1971. "Distortions in Factor Markets and the General Equilibrium Model of Production," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 437-59, May-June.
  18. Anderson, James E & Neary, J Peter, 1992. "Trade Reform with Quotas, Partial Rent Retention, and Tariffs," Econometrica, Econometric Society, vol. 60(1), pages 57-76, January.
  19. James E. Anderson, 1988. "The Relative Inefficiency of Quotas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262511789, December.
  20. Foster, Edward & Sonnenschein, Hugo, 1970. "Price Distortion and Economic Welfare," Econometrica, Econometric Society, vol. 38(2), pages 281-97, March.
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