Industrial organization implications of QR trade regimes : evidence and welfare costs

Quantitative restrictions (QRs) are the most common form of protection in many developing countries. Often this type of protection emerges during balance of payments crises but, once in place, is not removed. Students of developing countries'foreign exchange regimes have long noted that QRs have deleterious effects beyond those that would emerge from calculations relying strictly on the"tariff equivalent"of quotas. So far most analysis has concentrated on quantifying the cost of rent-seeking activities which allegedly accompany QRs. The purpose of this paper is to extend this analysis by parametrizing two stylized observations that have often been noted about the manufacturing sector of QR-riddenforeign trade regimes: (a) unrealized economies of scale; and (2) lack of competition among domestic firms. The first arises because of the small size of the domestic market; the second arises because of the made-to-measure protection of QR trade regimes. This paper reviews evidence on linkages between firm behaviour, firm size and restrictiveness of the trade regime in semi-industrial developing countries and reports on simulations from a three sector model that explores the sensitivity of numerical estimates to the parameters describing foreign trade and firm behavior under increasing returns of scale.