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Tariffs, import quotas, voluntary export restraints and immiserizing growth.

The differences among tariffs, import quotas and voluntary restraints in their economic effects have been discussed extensively in the literature (1, 3, 5). The purpose of this paper is to show another difference among them. It will be shown that a country may or may not experience immiserizing growth in the presence of a trade restriction. The outcome depends on whether the country restricts its trade with tariffs, import quotas or voluntary export restraints. The offer curve approach (4) is used in this study. It is assumed that neither the exportable good nor the importable good is an inferior good.

In Figure 1, the horizontal axis and the vertical axis measure the exportable good X and the importable good Y of the home country A, respectively. OA is the free trade offer curve of country A before growth. OB is the free trade offer curve of the foreign country.

Now assume that country A wants to reduce the amount of imports to, say, OQ of good Y. Country A can attain this goal by imposing a tariff. O[A.sub.t] is the offer curve after the tariff which intersects OB at E. The welfare of country A will be represented by the trade indifference curve I or its corresponding consumption indifference curve c, which is tangent to the pregrowth production possibility curve MN.

Country A also could attain the same goal by imposing an import quota equal to OQ of good Y. The offer curve after the import quota is OGQ, which intersects OB at E. Like the tariff case, the welfare of country A is represented by the trade indifference curve I?

Lastly, country A also could restrict its imports by using a voluntary export restraint. In this case, country A will reach point G where the foreign offer curve after the voluntary export restraint, OEG, intersects OA. The welfare of country A will be represented by the trade indifference curve [I.sub.v].(2)

Next suppose that there is an increase in import demand (or export supply) due to growth (2). Country A's free trade offer curve will shift to [Mathematical Expression Omitted]. This is because given any international price line, country A would like to export more and import more after the increase in import demand.

After growth, the offer curve of country A under the import quota becomes [Mathematical Expression Omitted], which intersects OB at E. The welfare of country A is now represented by the dashed trade indifference curve [Mathematical Expression Omitted] or the corresponding consumption indifference curve [Mathematical Expression Omitted] which is tangent to the postgrowth production possibility curve [Mathematical Expression Omitted]. This means that the welfare of country A always increases after growth. Growth will lead (1) to an increase in welfare as the production possibility curve shifts outwards. However, it might also lead (2) to a change in the terms of trade which might benefit or hurt the country. Moreover, it might lead (3) to a change in the volume of trade and thus enhance or reduce the gains from trade. In the presence of an import quota, the last two effects are absent. Hence, growth unambiguously makes the country better off.

On the other hand, under the tariff, the tariffdistorted offer curve after the increase in import demand is [Mathematical Expression Omitted] which intersects OB at F. The welfare of country A is represented by the dashed trade indifference curve [Mathematical Expression Omitted].(4) Since both I and [Mathematical Expression Omitted] represent a lower welfare level than [Mathematical Expression Omitted], the welfare level represented by [Mathematical Expression Omitted] could be lower than the welfare level represented by I. This means that immiserizing growth can arise under the tariff.(5)

Unlike the import quota case where the terms of trade and the amount of imports remain the same after growth, the amount of imports increases and the terms of trade deteriorate after growth under the tariff. Thus, when the gains from growth and the increase in imports are more than offset by the loss from the deterioration in the terms of trade, the welfare of country A decreases.

Lastly, under the voluntary export restraint, country A will reach point [Mathematical Expression Omitted] (where the foreign offer curve [Mathematical Expression Omitted] intersects [Mathematical Expression Omitted]) after growth. The welfare of country A will be represented by the dashed trade indifference curve [Mathematical Expression Omitted] at [Mathematical Expression Omitted].(6) The welfare level represented by [Mathematical Expression Omitted] can be lower than the welfare level represented by the trade indifference curve [I.sub.v] before growth.(7) This is because the gain from growth could be more than offset by the loss from the deterioration in the terms of trade after growth.

Figure 2 shows the case where there is a decrease in import demand (or export supply) after growth. After the decrease in import demand, the free trade offer curve of country A shifts to [Mathematical Expression Omitted].(8) This is because given any international price line, country A would like to import less and export less after the decrease in import demand.

Under the import quota, country A's offer curve becomes [Mathematical Expression Omitted] after growth which intersects OB at E. The welfare of country A after growth is represented by the dotted trade indifference curve [Mathematical Expression Omitted](9) or the corresponding consumption indifference curve [Mathematical Expression Omitted], which is tangentto the postgrowth production possibility curve [Mathematical Expression Omitted]. Since the consumption indifference curve c after growth always lies above the consumption indifference curve c before growth, immiserizing growth never arises.

Under the tariff, the tariff-distorted offer curve shifts to [Mathematical Expression Omitted], after the decrease in import demand. [Mathematical Expression Omitted] intersects OB at U. The welfare of country A is now represented by the dotted trade indifference curve [Mathematical Expression Omitted].(10) Since both I and [Mathematical Expression Omitted] represent a lower welfare level than [Mathematical Expression Omitted], the welfare level represented by [Mathematical Expression Omitted] could be lower than the welfare level represented by I. This means that immiserizing growth could take place under the tariff. This is because the gains from growth and the improvement in the terms of trade can be more than offset by the loss from the reduction in imports.(11)

Lastly, under the voluntary export restraint, country A will reach point [Mathematical Expression Omitted] (where the foreign offer curve [Mathematical Expression Omitted] intersects [Mathematical Expression Omitted]) after growth. The welfare of country A will be represented by the dotted trade indifference curve [Mathematical Expression Omitted] at [Mathematical Expression Omitted]. The welfare level represented by [Mathematical Expression Omitted] will be always higher than the welfare level represented by the trade indifference curve [I.sub.v] before growth.(12) This is because country A gains from growth and the improvement in the terms of trade after growth.

In conclusion, this paper shows another difference among tariffs, import quotas and voluntary export restraints. Immiserizing growth never arises in the presence of import quotas. This is true whether there is an increase in import demand or a decrease in import demand after growth. On the other hand, immiserizing growth can occur in the presence of tariffs. This is true whether growth leads to an increase in import demand or a decrease in import demand. Lastly, immiserizing growth never arises in the presence of voluntary export restraints if there is a decrease in import demand after growth. However, immiserizing growth could take place in the presence of voluntary export restraints if there is an increase in import demand after growth.

The author is grateful to an anonymous referee for valuable comments, but is responsible for any error which remains.

Notes

1. It is assumed that the government of country A raises import quota revenues by selling import licenses through competitive auctions. Then, like tariff revenues, import quota revenues are redistributed to the private sector. Draw line Og which has a slope equal to the slope of I at E. Line Og intersects OA at h. The tariff revenue (or the import quota revenue) is spent on fh of good X and fE of good Y.

2. Under a voluntary export restraint, the import restriction is administered by the exporting country. Therefore, the revenue from the import restriction is captured by the exporting country. EG measures the revenue captured by country B.

3. The dashed trade indifference curves represent the new trade indifference curves after the increase in import demand. They are derived with a new production possibility curve after growth.

4. On the one hand, the tariff rate is the same before and after growth. On the other hand, the international price line OF (not drawn) after growth is less steep than the international price line OE (not drawn) before growth. Therefore, the slope of [Mathematical Expression Omitted] at F (which measures the domestic price ratio after growth) is less than the slope of I at E (which measures the domestic price ratio before growth).

5. Immiserizing growth, however, never takes place if [Mathematical Expression Omitted] intersects OB at W (where [Mathematical Expression Omitted] intersects OB) or at a point between E and W.

6. After the increase in import demand in country A, country B's exports remain the same as OQ of good Y. However, the revenue captured by country B is increased from EG to [Mathematical Expression Omitted].

7. Since both [I.sub.v] and [Mathematical Expression Omitted] represent a lower welfare level than [Mathematical Expression Omitted], it is possible that [Mathematical Expression Omitted] represents a lower welfare level than [I.sub.v].

8. [Mathematical Expression Omitted] cannot lie to the left of O[A.sub.t]. Otherwise quota OQ cannot remain binding after the decrease in import demand.

9. The dotted trade indifference curves represent the new trade indifference curves after the decrease in import demand. They are derived with a new production possibility curve after growth.

10. On the one hand, the tariff rate is the same before and after growth. On the other hand, the international price line OU (not drawn) after growth is steeper than the international price line OE (not drawn) before growth. Therefore, the slope of [Mathematical Expression Omitted] at U (which measures the domestic price ratio after growth) is greater than the slope of I at E (which measures the domestic price ratio before growth).

11. Immiserizing growth, however, cannot arise if [Mathematical Expression Omitted], intersects OB at S (where [Mathematical Expression Omitted] intersects OB) or at a point between E and S.

12. [Mathematical Expression Omitted] represents a higher welfare level than [Mathematical Expression Omitted], which in turn represents a higher welfare level than [I.sub.v].

References

Bhagwati, Jagdish N. and Srinivasan, T.N., Lectures on International Trade, MIT Press (1983), Chapter 10.

Johnson, Harry G., International Trade and Economic Growth, London: George Allen and Unwin (1958), Chapter 3.

Markusen, James R., et al., International Trade, McGraw-Hill (1995), Chapter 16.

Meade, James E., A Geometry of International Trade, London: George Allen and Unwin (1952).

Takacs, Wendy E., "The Non-equivalence of Tariffs, Import Quotas and Voluntary Export Restraints," Journal of International Economics, Vol. 8, No. 4, (November 1978), pp. 565-573.
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Author:Yeh, Y.H.
Publication:American Economist
Date:Mar 22, 1999
Words:1863
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