International capital mobility and the costs of U.S. import restraints

In a series of recent papers, Neary and others have established the importance of trade in factor services, especially capital, in determining the welfare effects of import restrictions by tariffs, QRs, and VERs. In the absence of induced terms-of-trade changes and rental rate effects, Neary demonstrates that international capital mobility raises the costs of tariff protection and lowers that of QRs and VERs. This paper examines the impact of international capital mobility on the welfare effects of import protection by tariff, QRs, and VERs. Generalizing the work of Neary and others to take explicit account of induced terms-of-trade and rental rate effects, this paper demonstrates that the qualitative influence of capital mobility on the costs of protection cannot be ascertained unambiguously. The aggregate welfare effects of import restraints for the U.S. are simulated under different assumptions about international capital mobility, and the influence of the size of the U.S. in world markets. The paper sets up an analytical model that indicates the general links between international capital mobility and the welfare effects of different forms of import restraint. It reports onthe estimated welfare impact of international capital mobility on the welfare effects of U.S. import protection.