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A New Approach to Evaluating Trade Policy

  • Anderson, James E
  • Neary, J Peter

The authors introduce a new measure, the Trade Restrictiveness Index, to measure the restrictiveness of a system of trade protection. They propose an alternative to the commonly used ad hoc indexes of trade restrictiveness, such as the trade-weighted average tariff. That measure has no welfare-theoretic basis and can be highly misleading, in practice. For example, the complete exclusion of trade in a commodity would usually lower the index, because its trade weight would fall to zero. The authors show that their proposed index is soundly based in standard welfare economics. When trade is restricted by tariffs only, the Trade Restrictiveness Index equals the uniform tariff, which would be equivalent to the existing system of tariffs in the sense of yielding the same level of aggregate welfare. But tariffs have declined in importance in recent years as a means of restricting trade, so the measure must also be able to take account of quantitative restrictions on trade. Where quotas are the only form of restriction, this is easy: the Index equals the equiproportionate reduction in permitted import volumes that is welfare-equivalent to the initial structure of quotas. When both quotas and tariffs are present, the Index can be defined as the uniform tariff factor (one plus the uniform tariff) and uniform import reduction factor which would yield the same level of welfare as the initial system of trade restrictions. The authors show how this can be formulated, noting that if a single good is subject to both a binding quota and a tariff, it should be viewed as quota-constrained - the tariff serves merely to ensure that some of the rents accrue to the importing country. These theoretical derivations permit a major synthesis of the theory of protection and suggest how the results of computable general equilibrium models might be presented to make them internationally and intertemporally comparable. But in most cases such a model is not available and, even if it were, it would

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Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 63 (1996)
Issue (Month): 1 (January)
Pages: 107-25

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Handle: RePEc:bla:restud:v:63:y:1996:i:1:p:107-25
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  1. Neary, J. P. & Roberts, K. W. S., 1980. "The theory of household behaviour under rationing," European Economic Review, Elsevier, vol. 13(1), pages 25-42, January.
  2. 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.
  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. 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.
  5. Falvey, Rodney E., 1988. "Tariffs, quotas and piecemeal policy reform," Journal of International Economics, Elsevier, vol. 25(1-2), pages 177-183, August.
  6. Trela, I. & Whalley, J., 1989. "Unravelling The Threads Of The Mfa," Papers 448, Stockholm - International Economic Studies.
  7. James E. Anderson, 1988. "The Relative Inefficiency of Quotas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262511789, June.
  8. Foster, Edward & Sonnenschein, Hugo, 1970. "Price Distortion and Economic Welfare," Econometrica, Econometric Society, vol. 38(2), pages 281-97, March.
  9. Lopez, Ramon & Panagariya, Arvind, 1992. "On the Theory of Piecemeal Tariff Reform: The Case of Pure Imported Intermediate Inputs," American Economic Review, American Economic Association, vol. 82(3), pages 615-25, June.
  10. Corden, W. Max & Falvey, Rodney E., 1985. "Quotas and the second best," Economics Letters, Elsevier, vol. 18(1), pages 67-70.
  11. 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.
  12. Hatta, Tatsuo, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 1-21, February.
  13. 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.
  14. Fukushima, Takashi, 1981. "A dynamic quantity adjustment process in a small open economy, and welfare effects of tariff changes," Journal of International Economics, Elsevier, vol. 11(4), pages 513-529, November.
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