Replacing quantitative trade restrictions with tariffs

There are two reasons why it is broadly accepted that moving from nontariff barriers to tariffs is a move toward a more open trade policy: 1. Tariffs are generally less protective than quantitative restrictions (although it is possible to have tariffs set so high that they prohibit imports). 2. A tariff is a price instrument, not a quantity instrument. As a result, tariffs are more "transparent" - changes in foreign prices feed through more readily to the domestic economy. Quotas, by contrast, uncouple national economies from the world economy.

The evidence strongly suggests that a shift from quotas to tariffs as a form of protection is highly beneficial. Not only does the economy's growth often speed up following such shifts, but even in the sectors whose protection had been lowered, production increases as firms began to operate in a less restrictive and more transparent regime. This suggests that in an economy in which trade is regulated largely by quantitative restrictions - and this is true for most economies in which trade is severely restricted - a liberalization policy should start with a shift from the use of quotas to the use of tariffs, even if it means very high tariffs.

In India cotton is protected by quantitative restrictions, and textile producers are required to use Indian cotton. As a result, movements in the price of this crucial raw material are not always related to those of world cotton prices, which determine the cost of this input to competitors. It is therefore difficult for Indian producers to commit themselves to production for export: the conditions under which they have to compete are unpredictable.

In many cases a shift from quotas to tariffs has been a key element in the early stages of trade policy reform. Sometimes it has been the only element. For example, Israel's first and second phases of reform focused on imports and consisted of the gradual removal of quotas and their replacement with tariffs. Greece's first reforms removed almost all quotas and replaced them with tariffs which were for the most part lower than the tariff equivalent of the quotas.

It is probably not useful to attempt to calculate the level of tariffs needed to replace any given quantitative restriction because, in practice, it is difficult to measure the protection from quantitative restrictions, and because the switch to tariffs brings about such large changes in the way protection works. Some countries have sought to replace quantitative restrictions with more or less equivalent tariffs. For example, Sri Lanka replaced quantitative restrictions with high tariffs in 1977, and the Philippines did this in an [ad hoc] process from 1957 to the mid-l960s (and ended up unintentionally reducing average protection). In Argentina, however, the tariffs used to replace most of the quantitative restrictions in 1976-78 were on average so high that they shut out imports just as effectively.

Type Classification:
E: Emanations of other strategies