Trade Restrictions as Facilitating Practices

Kala Krishna ()

No 1546, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper deals with the effect of trade restrictions on competition in oligopolistic markets. Quantitative restrictions, such as VER's (Voluntary Export Restrictions) are shown to affect the extent to which foreign firms can compete in the domestic market, and hence to raise the equilibrium prices and profits of both domestic and foreign firms --when such restrictions are not too severe. This increase in prices and profits is shown to make it unlikely for VER's to raise National Welfare. In addition, I show that domestic output may fall due to the VER's. For these reasons, VER's do not seem to be desirable ways of restricting imports.Tariffs and Quotas are also shown to be non-equivalent in such oligopoly models. A comparison of the effects of tariffs and quotas shows that it would be in the interest of domesti cmanufacturers t lobby for VER's instead of import equivalent tariffs. In addition, it is shown that the foreign firm would prefer VER's to import equivalent tariffs, even if tariff revenues were refunded to them. Thus, the recent VER's on Japanese automobiles may well have been in the interests of both Japanese and American firms, and at the expense of the nation as a whole.

Date: 1985-01
Note: ITI IFM
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Published as Journal of International Economics, Vol. 26, pp. 251-270, (1989).

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