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A note on the nonequivalence of import barriers and voluntary export restraints
Journal of International Economics 16 (1984) 183-187. North-Holland
A NOTE
ON THE NONEQUIVALENCE AND VOLUNTARY EXPORT
OF IMPORT BARRIERS RESTRAINTS
Jose Saul L I Z O N D O * International Monetary Fund, Washington, D.C. 20431, USA
Received January 1982, revised version received May 1983 This paper uses a general equilibrium approach to analyze the consequences of import barriers and voluntary export restraints with respect to international prices and domestic prices under the assumption of perfect competition in all markets. It shows that the final outcome with respect to domestic prices depends on the way in which governments allocate the revenue arising from the restrictions. The equivalence result, obtained by using partial equilibrium, is only one of the possible outcomes.
I. Introduction T h e p r o p o s i t i o n t h a t tariffs a n d i m p o r t q u o t a s are equivalent in their e c o n o m i c effects has been extensively discussed in the literature. ~ M o r e recently, the analysis of the equivalence between different forms of t r a d e restrictions has been b r o a d e n e d by T a k a c s (1978) to include the case of v o l u n t a r y e x p o r t restraints. U s i n g p a r t i a l e q u i l i b r i u m analysis she considered several cases, r e g a r d i n g the c o m p e t i t i v e structure of the different markets, a n d c o n c l u d e d that v o l u n t a r y e x p o r t restraints are, in general, not equivalent to i m p o r t q u o t a s or tariffs. T h e p u r p o s e of this p a p e r is to analyze the equivalence between i m p o r t b a r r i e r s (tariffs or i m p o r t quotas) a n d v o l u n t a r y e x p o r t restraints (using e x p o r t taxes or e x p o r t quotas) u n d e r c o n d i t i o n s of perfect c o m p e t i t i o n in all m a r k e t s . The p r o p o s i t i o n of equivalence to be considered refers to whether an i m p o r t b a r r i e r a n d a v o l u n t a r y e x p o r t restraint, set so as to result in the s a m e e q u i l i b r i u m q u a n t i t y of imports, will also result in the same d o m e s t i c price in each c o u n t r y a n d the same i n t e r n a t i o n a l price. This is one of the cases a n a l y z e d by T a k a c s , where she finds that the equivalence p r o p o s i t i o n holds with respect to the d o m e s t i c price of the i m p o r t i n g country. Nevertheless, o u r conclusions are different because we use a general *This paper was written while the author was Professor of Economics at the lnstituto Tecnolrgico Aut6nomo de Mexico. Any views expressed in the paper represent the opinion of the author and should not be interpreted as official views of the International Monetary Fund. tSee Bhagwati (1965, 1968), Falvey (1975, 1976) Fishelson and Flatters (1975), Pelcovits (1976), Rodriguez (1974), Shibata (1968), Yadav (1968) and Young (1979). 0022-1996/84/$3.00 O 1984 Elsevier Science Publishers B.V. (North-Hollandl
184
J.S. Lizondo, Nonequivalenceof import barriers
equilibrium approach that forces us to explicitly take into account the way in which governments allocate the revenue arising from import barriers (tariffs or the sale of import licences in the case of import quotas) and export restraints (export taxes or the sale of export permits in the case of export quotas). The allocation of the revenue affects the final outcome. The equivalence result obtained by Takacs is only one of the possible alternatives. 2. The model
Let us consider two countries, I and II, and two goods, X and Y. Under free trade country I exports commodity X. Fig. 1 shows the offer curve of country I, 0I, and the offer curve of country II, 0II. Free trade equilibrium attains at point E with international and domestic relative price p=Px/Py equal to the slope of the ray (not shown) that goes from E to the origin. Assume now that country I decides to reduce to OS its level of imports of Y from the previous level of OH, using either a tariff or an import quota. Let us consider each case. If an import quota of size OS is used, international equilibrium attains at A with international relative price equal to the slope of the ray OA, that we denote by pA. The domestic relative price of country II is also equal to pA. The domestic relative price of country I depends on the way in which the government allocates the revenue arising from the sale of import licences. (i) If the government spends all the revenue on good X, the domestic relative price will equal the slope of the ray OB, that we denote by pB. (ii) If the government spends all the revenue on good Y, the domestic Y
OI E
H
D
o
~
Oil
X Fig. 1
J.S. Lizondo, Nonequivalence of import barriers
185
relative price will equal the slope of the ray OC, that we denote by pC. (iii) If the government spends part of the revenue on good X and the rest on good Y, the domestic relative price will lay between pB and pC. (iv) If the government redistributes the revenue to the private sector, the domestic relative price will be equal to the slope of the trade indifference curve of country I that passes through point A. For example, if both goods are normal the domestic relative price of country I will lay between pB and pC. Therefore, the domestic relative price of country I will be equal to pB only if the government spends all the revenue on good X, or, in the case of redistribution, if the private sector marginal propensity to consume Y is equal to zero. It is clear that each one of the possible results with an import quota can be reproduced by an adequate tariff of country I. The tariffs should be set so as to be consistent with the international price pA and the domestic price we want to reproduce, and the revenue should be spent in the same way it was spent under the quota. It is convenient to note that the tariff equivalent to a given import quota depends on the way in which the revenue is spent. For a given quota, the larger the fraction of the revenue spent on Y, the higher the corresponding tariff. Let us now turn to analyze the consequences of voluntary export restraints. If instead of using import barriers country I asks country II to voluntarily restrain its exports of Y to the level OS in fig. 1, country II can use either an export quota or an export tax. Assume first that an export quota of size OS is used. International equilibrium attains at point B with the international relative price and the domestic relative price of country I equal to pn. The domestic relative price of country II will lay in the region between pA and pO depending on whether the government spends all the revenue on good X, a combination of both goods, or on good Y only. On the other hand, if the government redistributes the revenue to the private sector the relative price will depend on the marginal propensities to consume both goods by the private sector. The domestic relative price of country II will be equal to pA only if the government spends all the revenue on good X, or in the case of redistribution, if the private sector marginal propensity to consume Y is equal to zero. Once again, it is clear that each one of the possible results with an export quota can be reproduced by an adequate export tax of country II. Also, note that the export tax equivalent to a given export quota depends on the way in which the revenue is spent. For a given export quota, the larger the fraction of the revenue spent on Y, the lower the corresponding export tax. Let us turn now to the comparison of import barriers and export restraints with respect to international and domestic relative prices. It is clear that both types of policies are not equivalent with respect to the international price. Import barriers set the price at pA and export restraints
186
J.S. Lizondo, Nonequivalence of import barriers
set the price at pB. Given that in both cases country I imports OS of Y, the only difference is how much it pays for those imports. With import barriers country I pays with SA of X and with export restraints it pays with SB of X. The difference, AB, is the revenue from the restrictions expressed in terms of X. In the case of import barriers country I gets the revenue and in the case of export restraint country II gets the revenue. Let us consider now the domestic relative prices under the two alternative types of policies. Under import barriers the domestic relative price of country II is equal to pA and the domestic relative price of country I depends on the way in which the revenue is spent. Under export restraint the domestic relative price of country I is equal to pn and the domestic relative price of country II depends on the way in which the revenue is spent. To have equivalence with respect to the domestic relative price of country I the revenue from import barriers should be spent, either by the government or the private sector of country I, only on good X. To have equivalence with respect to the domestic relative price of country II the revenue from export restraints should be spent, either by the government or the private sector of country II, only on good X. Therefore, in general the two types of policies will not be equivalent with respect to domestic relative prices. The results to the contrary, found using partial equilibrium, arise because the way in which the allocation of the revenue affects the demand for the good subject to the restriction, in our case good Y, is neglected. Not considering this effect is equivalent to the assumption that the revenue is always spent on the other good, in our case good X. Obviously, under this particular assumption it is correct to say that import barriers and export restraint are equivalent with respect to domestic relative prices.
3. Conclusions
Even under conditions of perfect competition in all markets, equivalence of domestic prices under import barriers and export restraints will not necessarily hold. As seen, the way in which the revenue arising from the restrictions is spent will affect the final outcome. The equivalence between the two types of policies is only one of the possible results. Finally, aside from the formal results on nonequivalence, our paper shows that the election between import barriers and export restraints will have other implications, two of which can be readily mentioned. First, from the point of view of the producer of good Y in country I, the level of protection implied by each alternative is different. In particular, if either the government disposes of the revenue by spending on both goods or, in the case of redistribution to the private sector, if the two goods are normal in country I, import barriers by country I protect more the domestic production of Y than voluntary export restraints by country II. Second, if both governments would
J.S. Lizondo, N onequivalence of import barriers
187
spend the revenue on both goods or, in the case of redistribution to the private sector, if both goods are normal in both countries, import barriers by country I imply a larger divergence in the domestic relative prices between both countries than voluntary restraint by country II.
References Bhagwati, Jagdish, 1965, On the equivalence of tariffs and quotas, in: R.E. Baldwin et al., eds., Trade, growth and the balance of payments - - Essays in Honor of G. Haberler (Rand McNally, Chicago) 53-67. Bhagwati, Jagdish, 1968, More on the equivalence of tariffs and quotas, American Economic Review 58, 142-146. Falvey, Rodney E., 1975, A note on the distinction between tariffs and quotas, Economica 42, 319-326. Falvey, Rodney E., 1976, A note on quantitative restrictions and capital mobility, American Economic Review 66, 217-220. Fishelson, Gideon and Frank Flatters, 1975, The (non) equivalence of optimal tariffs and quotas under uncertainty, Journal of International Economics 5, 385-393. Pelcovits, Michael D., 1976, Quotas versus tariffs, Journal of International Economics 6, 363370. Rodriguez, Carlos A., 1974, The non-equivalence of tariffs and quotas under retaliation, Journal of International Economics 4, 295-298. Shibata, Hirofumi, 1968, A note on the equivalence of tariffs and quotas, American Economic Review 58, 137-142. Takacs, Wendy E., 1978, The non-equivalence of tariffs, import quotas and voluntary export restraints, Journal of International Economics 8, 565-573. Yadav, Gopal J., 1968, A note on the equivalence of tariffs and quotas, Canadian Journal of Economics 1, 105-110. Young, Leslie, 1979, Ranking optimal tariffs and quotas for a large country under uncertainty, Journal of International Economics 9, 249-264.
A NOTE
ON THE NONEQUIVALENCE AND VOLUNTARY EXPORT
OF IMPORT BARRIERS RESTRAINTS
Jose Saul L I Z O N D O * International Monetary Fund, Washington, D.C. 20431, USA
Received January 1982, revised version received May 1983 This paper uses a general equilibrium approach to analyze the consequences of import barriers and voluntary export restraints with respect to international prices and domestic prices under the assumption of perfect competition in all markets. It shows that the final outcome with respect to domestic prices depends on the way in which governments allocate the revenue arising from the restrictions. The equivalence result, obtained by using partial equilibrium, is only one of the possible outcomes.
I. Introduction T h e p r o p o s i t i o n t h a t tariffs a n d i m p o r t q u o t a s are equivalent in their e c o n o m i c effects has been extensively discussed in the literature. ~ M o r e recently, the analysis of the equivalence between different forms of t r a d e restrictions has been b r o a d e n e d by T a k a c s (1978) to include the case of v o l u n t a r y e x p o r t restraints. U s i n g p a r t i a l e q u i l i b r i u m analysis she considered several cases, r e g a r d i n g the c o m p e t i t i v e structure of the different markets, a n d c o n c l u d e d that v o l u n t a r y e x p o r t restraints are, in general, not equivalent to i m p o r t q u o t a s or tariffs. T h e p u r p o s e of this p a p e r is to analyze the equivalence between i m p o r t b a r r i e r s (tariffs or i m p o r t quotas) a n d v o l u n t a r y e x p o r t restraints (using e x p o r t taxes or e x p o r t quotas) u n d e r c o n d i t i o n s of perfect c o m p e t i t i o n in all m a r k e t s . The p r o p o s i t i o n of equivalence to be considered refers to whether an i m p o r t b a r r i e r a n d a v o l u n t a r y e x p o r t restraint, set so as to result in the s a m e e q u i l i b r i u m q u a n t i t y of imports, will also result in the same d o m e s t i c price in each c o u n t r y a n d the same i n t e r n a t i o n a l price. This is one of the cases a n a l y z e d by T a k a c s , where she finds that the equivalence p r o p o s i t i o n holds with respect to the d o m e s t i c price of the i m p o r t i n g country. Nevertheless, o u r conclusions are different because we use a general *This paper was written while the author was Professor of Economics at the lnstituto Tecnolrgico Aut6nomo de Mexico. Any views expressed in the paper represent the opinion of the author and should not be interpreted as official views of the International Monetary Fund. tSee Bhagwati (1965, 1968), Falvey (1975, 1976) Fishelson and Flatters (1975), Pelcovits (1976), Rodriguez (1974), Shibata (1968), Yadav (1968) and Young (1979). 0022-1996/84/$3.00 O 1984 Elsevier Science Publishers B.V. (North-Hollandl
184
J.S. Lizondo, Nonequivalenceof import barriers
equilibrium approach that forces us to explicitly take into account the way in which governments allocate the revenue arising from import barriers (tariffs or the sale of import licences in the case of import quotas) and export restraints (export taxes or the sale of export permits in the case of export quotas). The allocation of the revenue affects the final outcome. The equivalence result obtained by Takacs is only one of the possible alternatives. 2. The model
Let us consider two countries, I and II, and two goods, X and Y. Under free trade country I exports commodity X. Fig. 1 shows the offer curve of country I, 0I, and the offer curve of country II, 0II. Free trade equilibrium attains at point E with international and domestic relative price p=Px/Py equal to the slope of the ray (not shown) that goes from E to the origin. Assume now that country I decides to reduce to OS its level of imports of Y from the previous level of OH, using either a tariff or an import quota. Let us consider each case. If an import quota of size OS is used, international equilibrium attains at A with international relative price equal to the slope of the ray OA, that we denote by pA. The domestic relative price of country II is also equal to pA. The domestic relative price of country I depends on the way in which the government allocates the revenue arising from the sale of import licences. (i) If the government spends all the revenue on good X, the domestic relative price will equal the slope of the ray OB, that we denote by pB. (ii) If the government spends all the revenue on good Y, the domestic Y
OI E
H
D
o
~
Oil
X Fig. 1
J.S. Lizondo, Nonequivalence of import barriers
185
relative price will equal the slope of the ray OC, that we denote by pC. (iii) If the government spends part of the revenue on good X and the rest on good Y, the domestic relative price will lay between pB and pC. (iv) If the government redistributes the revenue to the private sector, the domestic relative price will be equal to the slope of the trade indifference curve of country I that passes through point A. For example, if both goods are normal the domestic relative price of country I will lay between pB and pC. Therefore, the domestic relative price of country I will be equal to pB only if the government spends all the revenue on good X, or, in the case of redistribution, if the private sector marginal propensity to consume Y is equal to zero. It is clear that each one of the possible results with an import quota can be reproduced by an adequate tariff of country I. The tariffs should be set so as to be consistent with the international price pA and the domestic price we want to reproduce, and the revenue should be spent in the same way it was spent under the quota. It is convenient to note that the tariff equivalent to a given import quota depends on the way in which the revenue is spent. For a given quota, the larger the fraction of the revenue spent on Y, the higher the corresponding tariff. Let us now turn to analyze the consequences of voluntary export restraints. If instead of using import barriers country I asks country II to voluntarily restrain its exports of Y to the level OS in fig. 1, country II can use either an export quota or an export tax. Assume first that an export quota of size OS is used. International equilibrium attains at point B with the international relative price and the domestic relative price of country I equal to pn. The domestic relative price of country II will lay in the region between pA and pO depending on whether the government spends all the revenue on good X, a combination of both goods, or on good Y only. On the other hand, if the government redistributes the revenue to the private sector the relative price will depend on the marginal propensities to consume both goods by the private sector. The domestic relative price of country II will be equal to pA only if the government spends all the revenue on good X, or in the case of redistribution, if the private sector marginal propensity to consume Y is equal to zero. Once again, it is clear that each one of the possible results with an export quota can be reproduced by an adequate export tax of country II. Also, note that the export tax equivalent to a given export quota depends on the way in which the revenue is spent. For a given export quota, the larger the fraction of the revenue spent on Y, the lower the corresponding export tax. Let us turn now to the comparison of import barriers and export restraints with respect to international and domestic relative prices. It is clear that both types of policies are not equivalent with respect to the international price. Import barriers set the price at pA and export restraints
186
J.S. Lizondo, Nonequivalence of import barriers
set the price at pB. Given that in both cases country I imports OS of Y, the only difference is how much it pays for those imports. With import barriers country I pays with SA of X and with export restraints it pays with SB of X. The difference, AB, is the revenue from the restrictions expressed in terms of X. In the case of import barriers country I gets the revenue and in the case of export restraint country II gets the revenue. Let us consider now the domestic relative prices under the two alternative types of policies. Under import barriers the domestic relative price of country II is equal to pA and the domestic relative price of country I depends on the way in which the revenue is spent. Under export restraint the domestic relative price of country I is equal to pn and the domestic relative price of country II depends on the way in which the revenue is spent. To have equivalence with respect to the domestic relative price of country I the revenue from import barriers should be spent, either by the government or the private sector of country I, only on good X. To have equivalence with respect to the domestic relative price of country II the revenue from export restraints should be spent, either by the government or the private sector of country II, only on good X. Therefore, in general the two types of policies will not be equivalent with respect to domestic relative prices. The results to the contrary, found using partial equilibrium, arise because the way in which the allocation of the revenue affects the demand for the good subject to the restriction, in our case good Y, is neglected. Not considering this effect is equivalent to the assumption that the revenue is always spent on the other good, in our case good X. Obviously, under this particular assumption it is correct to say that import barriers and export restraint are equivalent with respect to domestic relative prices.
3. Conclusions
Even under conditions of perfect competition in all markets, equivalence of domestic prices under import barriers and export restraints will not necessarily hold. As seen, the way in which the revenue arising from the restrictions is spent will affect the final outcome. The equivalence between the two types of policies is only one of the possible results. Finally, aside from the formal results on nonequivalence, our paper shows that the election between import barriers and export restraints will have other implications, two of which can be readily mentioned. First, from the point of view of the producer of good Y in country I, the level of protection implied by each alternative is different. In particular, if either the government disposes of the revenue by spending on both goods or, in the case of redistribution to the private sector, if the two goods are normal in country I, import barriers by country I protect more the domestic production of Y than voluntary export restraints by country II. Second, if both governments would
J.S. Lizondo, N onequivalence of import barriers
187
spend the revenue on both goods or, in the case of redistribution to the private sector, if both goods are normal in both countries, import barriers by country I imply a larger divergence in the domestic relative prices between both countries than voluntary restraint by country II.
References Bhagwati, Jagdish, 1965, On the equivalence of tariffs and quotas, in: R.E. Baldwin et al., eds., Trade, growth and the balance of payments - - Essays in Honor of G. Haberler (Rand McNally, Chicago) 53-67. Bhagwati, Jagdish, 1968, More on the equivalence of tariffs and quotas, American Economic Review 58, 142-146. Falvey, Rodney E., 1975, A note on the distinction between tariffs and quotas, Economica 42, 319-326. Falvey, Rodney E., 1976, A note on quantitative restrictions and capital mobility, American Economic Review 66, 217-220. Fishelson, Gideon and Frank Flatters, 1975, The (non) equivalence of optimal tariffs and quotas under uncertainty, Journal of International Economics 5, 385-393. Pelcovits, Michael D., 1976, Quotas versus tariffs, Journal of International Economics 6, 363370. Rodriguez, Carlos A., 1974, The non-equivalence of tariffs and quotas under retaliation, Journal of International Economics 4, 295-298. Shibata, Hirofumi, 1968, A note on the equivalence of tariffs and quotas, American Economic Review 58, 137-142. Takacs, Wendy E., 1978, The non-equivalence of tariffs, import quotas and voluntary export restraints, Journal of International Economics 8, 565-573. Yadav, Gopal J., 1968, A note on the equivalence of tariffs and quotas, Canadian Journal of Economics 1, 105-110. Young, Leslie, 1979, Ranking optimal tariffs and quotas for a large country under uncertainty, Journal of International Economics 9, 249-264.