TITLE

The Optimum Quota and Retaliation

AUTHOR(S)
Tower, Edward
PUB. DATE
October 1975
SOURCE
Review of Economic Studies;Oct75, Vol. 42 Issue 4, p623
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
It is well known that a country can generally raise its welfare above that which prevails under free trade by imposing a tariff on imports. Moreover, under competitive conditions, it is well known that for every tariff there is an" equivalent quota" on imports or exports which will have equivalent economic effects in all respects. Thus, any welfare increase can be brought about equally well through a system of quotas as through a tariff, and the" optimum quota" is simply that quota which is equivalent to the "optimum tariff". Over twenty years ago in this journal Harry G. Johnson [6] explored what would happen to a country which imposes the optimum tariff when its trading partner retaliates by imposing the optimum tariff in its turn. In Johnson's analysis [6, p. 142]," it is assumed that' retaliation' takes the form of the imposition of an optimum tariff, on the assumption that the other country's tariff will remain unchanged ", and the two countries take turns imposing the optimum tariff until a commercial-policy equilibrium or a recurrent tariff cycle is attained. As Johnson showed, a country may gain by imposing a tariff even if other countries retaliate. In this paper we show that a country can never gain by imposing a quota if other countries retaliate by imposing either an optimum tariff or an optimum quota. In a companion paper [10] it is shown that when both countries use tariffs trade will never approach zero so long as in autarky neither country would be specialized. However, in this paper we demonstrate that trade will always approach zero (barring a curiosity investigated in Section 5) if one country uses a quota while the other uses either a tariff or a quota and both countries assume that the other country's protective legislation will remain unchanged.
ACCESSION #
4622849

 

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