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Department of Business and Economics, University of Southern Denmark Discussion Papers of Business and Economics
Department of Business and Economics, University of Southern Denmark

No 11/2013:
On the Equivalence of Tariffs and Quotas for Customs Unions

Jørgen Drud Hansen () and Davide Sala ()

Abstract: While quotas can be expressed in tariff-equivalent terms and have identical economic effects under some conditions, they do not share the same welfare implications with tariffs in the presence of a piecemeal reform (second-best). In this paper we show that this non-welfare equivalence persists in perfect competition when countries undergo regional integration. A Pareto improving customs union is nevertheless viable in both protection regimes, but it requires different trade policy adjustments. When we extend the analysis beyond the competitive framework and consider shocks to the economy or imperfect markets, this general desirability of unions is unfortunately lost. But we show that, interestingly, the equivalence between tariff and quota regimes can still arise under particular circumstances, and only quotas provide countries with full insurance from price fluctuations.

Keywords: Equivalence; tariffs and quotas; customs union; (follow links to similar papers)

JEL-Codes: F13; F15; (follow links to similar papers)

31 pages, August 13, 2013

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