Tariffs vs. Quotas over the Business Cycle

Tariffs vs. Quotas over the Business Cycle

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This paper extends the literature on tariffs vs. quotas by comparing their impacts in a world of macroeconomic shocks and trade account imbalances with fixed exchange rates. The effects of tariffs and quotas on output, prices, import volumes, and profits are compared both when business cycles originate in the importing country and when they start in the exporting country. In the former case the maintenance of a tariff reduces the domestic effect of a business cycle by passing some of its effects through to exporters, while a quota contains the effects of such shocks within the importing economy. When business cycles originate in the exporting country, most of the earlier conclusions are reversed. Countries wishing lo minimize the disruptive impacts of domestic business cycles should choose tariffs rather than quotas as the primary tool of commercial policy, while those worried primarily about the domestic effects of foreign macroeconomic shocks should rely on quotas rather than tariffs.