Working Paper: CEPR ID: DP345
Authors: J. Peter Neary
Abstract: This paper examines the welfare effects of partial trade liberalization when trade is restricted by tariffs, quotas or some combination of both instruments. Rules for optimal first- and second-best intervention are derived and illustrated (using a new geometric technique) in both small and large open economies. A general expression for shadow prices of factors of production, which applies in both small and large economies, with or without quotas, is also derived. Welfare paradoxes are possible whenever exogenous changes raise (lower) imports of goods subject to trade restrictions which are below (above) optimal levels.
Keywords: tariffs; quotas; trade liberalization; piecemeal policy reform; shadow prices; immiserizing growth
JEL Codes: 41; 42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing imports of goods subject to higher than optimal tariffs (F14) | welfare (I38) |
| decreasing imports of goods subject to lower than optimal tariffs (F13) | welfare (I38) |
| radial reduction in tariffs (F13) | welfare (I38) |
| nonuniform reduction in tariffs (F13) | welfare (I38) |
| relaxing quotas on goods (F13) | welfare (I38) |
| quota relaxation discouraging imports of tariff-constrained goods (F14) | welfare (I38) |
| unit increase in permitted level of imports (F14) | change in quota rents (R21) |
| change in quota rents (R21) | welfare cost of induced changes in terms of trade (F16) |
| shadow prices diverging from market prices (G19) | welfare effects (D69) |
| factor accumulation raising output of goods subject to tariffs (F16) | shadow prices (P22) |