Tariffs and Quotas in an Endogenous Policy Model

Tariffs and Quotas in an Endogenous Policy Model: Are Tariffs Still Better than Quotas?

Conventional models of international trade show that if foreign trade must be restricted, tariffs can accomplish the task at a lower welfare cost than equivalent” quotas. But both the choice of trade restriction and the level of protection are the result of endogenous economic and political forces. Precisely because welfare effects differ, equivalent” tariffs and quotas are not politically-equivalent.” Therefore, tariffs and quotas should be compared using an endogenous policy model. Simulation of the model verifies that prohibiting quotas while permitting tariffs could actually lower welfare, thus bringing into question the generality of policy prescriptions based on conventional trade models.