The Relative Inefficiency of Quotas

Abstract

creasing protection in the world economy in the last twenty-five years. Textiles, steel, and autos are well-known examples. Any increase in protection is usually inefficient.' A major and unappreciated fact is that the QR method of increase in protection is itself a source of further inefficiency in at least two ways. First, the political economy model suggests that protection will be greater under QRs than under tariffs. Political economy views protection as a commodity, subject to supply and demand analysis. I will show below that under a QR regime (a basic arrangement that permits QRs), the supply curve and possibly the demand curve are shifted to the right. Other things being equal, this leads to more protection. Political economy also suggests that resources spent to secure protection (rent-seeking) will be greater, causing further social waste. Second, for the principal protectionist targets, such as textiles or shoe employment, QRs are more inefficient than is a tariff that restricts imports by the same amount. The reason for this is deeply satisfying to an economist: QRs further limit the operation of markets, reducing the efficiency of the price system. In this paper, I review recent research showing that QRs are ordinarily more inefficient than are the tariffs that would achieve the same protectionist goal. There are motives for protection that can reverse the ranking under some assumptions, but their combined structure is rather special. For practical purposes, outside of agriculture, protection in OECD-type countries would be more cheaply done with tariffs. Even in such special cases, feasible tariff schedules that vary the tax rate with some variable, such as import volume or foreign price, will generally dominate quotas. The starting place for analysis is a simple model in which tariffs and quantitative restrictions are equivalent. All undergraduate international trade textbooks start with this case. Although pedagogically convenient, in that it shows that the same incidence analysis developed for tariffs can immediately be used for QRs, the equivalence analysis is fundamentally misleading in suggesting the practical equivalence of the two. All the textbooks with which I am familiar follow the equivalence analysis, devoting, at most, several lines giving circumstances in which the two are not equivalent. Sometimes, a presumption for tariffs is vaguely sketched (a tariff is more

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