Costly distribution and the non-equivalence of tariffs and quotas

Abstract

When governments impose a quota or tariff on imports, it is well known that the resulting rents and revenues trigger costly rent-seeking and revenue-seeking activities, which are welfare-reducing and may be economically more significant than the efficiency losses resulting from the protectionist-induced resource misallocation. Repeated interaction among firms can eliminate wasteful rent-and revenue-seeking expenditures through cooperation. We show that while aggregate outcomes are equivalent under tariffs and quotas if cooperation arises, the conditions under which cooperation arises differ by policy. This difference arises because a firm must incur additional cost to physically import and distribute the goods associated with additional quota licenses, whereas there is no such cost when it comes to consuming additional tariff revenue. Thus, quotas and tariffs are nonequivalent. We provide a simple sufficient condition under which cooperative elimination of rent-seeking under quotas is easier than cooperative elimination of revenue-seeking under tariffs and therefore a quota is the preferred policy whenever the policy admits cooperation.

The instability of globalization: applying evolutionary game theory to global trade cooperation

“…What is most important, we treat the countries in our population as unitary actors and do not open the black box of domestic politics. The influence of domestic politics on countries' trade policies is discussed extensively in the literature (e.g., Arce et al 2008;Baldwin and Magee 2000;DeVault 2013;Hoffman 2009;Mansfield et al 2000Mansfield et al , 2002Nollen and Iglarsh 1990;Wagner and Plouffe 2019); most public choice models of protectionism concentrate on the domestic realm (e.g., Damania et al 2004;Lake and Linask 2015;Pecorino 1997;Aidt 1997). For the moment, we chose to omit domestic politics and to concentrate on the global dynamics of trade cooperation because this level of analysis has been subject to far less theoretical development over the past two decades.…”

“…Much of public choice literature concentrates on the domestic politics behind external trade policies and treats countries' policymaking largely as independent of international politics. Based on the well-known argument that trade liberalization generally is welfare increasing, many scholars propose that protectionist measures result from rent-seeking by concentrated and well-organized interests (Damania et al 2004;Lake and Linask 2015;Pecorino 1997;Aidt 1997). Principally concentrating on the trade policies of the United States, the literature further explores how factors like the rules of electoral competition (Baldwin and Magee 2000;DeVault 2013;Wagner and Plouffe 2019), political ideologies (Hoffman 2009;Nollen and Iglarsh 1990) or economic sensitivities (Arce et al 2008;Nollen and Iglarsh 1990) determine the chances of protectionist interests' success.…”