3.3 The Model
3.3.3 Trade Quality effect
Comparative statics shed light on the consequences of changes in the policy vari- ables on the composition of imports. The following section presents the impact of a change in the high-quality quota level and of changes in all tariffs components for both qualities: in-quotaad valorem tariff, out-of-quota ad valorem tariff and out-of-quota specific component.
Three distinct cases can occur depending on the fill-rate of the TRQ. First, when high-quality imports are below the quota level, a decrease in the spe- cific tariff T affects only the price of low-quality imports. The consequence is an increase in the relative share of the low-quality imports.
∂mh/ml ∂T = σλh (plw(1+t)+T)λh phw(1+th)λl σ−1 phw(1 +th)λl >0 if mh <q¯h. (3.13)
When high-quality imports exceed the quota, a reduction in the specific tariffT also results in a quality downgrade due to the typical Alchian-Allen effect as shown in (3.14): ∂mh/ml ∂T =σ λ h (phw(1 +t) +T)λl − (plw(1 +t) +T)λh (phw(1 +t) +T)2λl (plw(1 +t) +T)λh (phw(1 +t) +T)λl σ−1 >0 if mh >q¯h. (3.14)
Finally, when high-quality imports are exactly at the quota level there are two possible effects, because T affects pl but also affects the upper bound
of tm. The latter introduces a possible shift from an at-quota to an out-
of-quota regime. If the variation of T leaves the TRQ regime unaffected (we remain in the at-quota regime), we have a quality downgrading due to the increase inml. But if the decrease in T switches the TRQ regime from
at-quota to out-of-quota regime, not only doesml increase but so doesmh.
Even in that case a cut in the specific tariff results in quality downgrading, because a reduction inT has a greater impact on ml than onmh, according
to the Alchian-Allen effect. The magnitude of this positive effect will vary between the two cases depicted in (3.13) and (3.14).
The partial derivatives of the relative functions for both the in-quota and the out-of-quota demands are positive. In brief, when the specific tariff decreases, consumers demand relatively less of the expensive high-quality product, in line with the traditional Alchian-Allen conjecture.
The case is more complex when the ad valorem component of the EU tar- iff t varies, since t is imposed on imports of both qualities. The partial derivatives relative totshow opposite signs depending on the fill rate of the TRQ.
If high-quality imports are below the quota, a reduction in t affects only low-quality beef, and results in largerml imports (quality downgrading).
∂mh/ml ∂t = plwσλh (plw(1+t)+T)λh (1+th)phwλl σ−1 (1 +th)phwλl >0 if mh <q¯h. (3.15)
When high-quality imports exceed the quota, the left hand side of (3.15) is negative sincephw is greater thanplw. The reduction of anad valorem com-
ponent increases the relative quality of beef imports under our assumptions. This result seems to be at odds with Falvey (1979) and with Boorstein and Feenstra (1991). Both find that in a first-best setting, anad valorem tariff has no effect on the quality composition of trade. In our case, however, the specific tariff plays a role similar to that of the per-unit cost in Hummels and Skiba (2004). The ad valorem tariff dampens the effect of the specific tariff on the relative demand for the high-quality product.
∂mh/ml ∂t =σ plwλh (phw(1 +t) +T)λl − phw(plw(1 +t) +T)λh (phw(1 +t) +T)2λl (plw(1 +t) +T)λh (phw(1 +t) +T)λl σ−1 <0 if mh >q¯h. (3.16)
If the high-quality quota is just binding, a change in t affects not only pl
but also the upper bound oftm. There is a possible shift from one regime to
another. Ift decreases and the regime remains unchanged,pl also decreases
and there is a quality-downgrading. However, in the case of a shift to the out-of-quota regime, the average quality of imports increases (quality upgrading). For the at-quota regime the effect of thead valorem component of the out-of-quota tariff is ambiguous.
In brief, the consequences of a change in the ad valorem tariff on the com- position of imports are ambiguous. When high-quality imports are below the quota a reduction in t has a quality downgrading. The opposite result holds true when imports exceed the quota. The effect on quality cannot be determined in a general case, under the at-quota regime.
• If the ad valorem in-quota tariff varies:
The ad valorem in-quota tariff th appears in the relative demand function
only when high-quality imports are below the quota level. When the quota is not binding, a reduction ofth has a quality upgrading.
∂mh/ml ∂th =− (plw(1 +t) +T)σλh (plw(1+t)+T)λh (1+th)phwλl σ−1 (1 +th)2pphwλl <0 if mh <q¯h. (3.17)
When the quota is binding (both when imports are at-quota and exceed the quota), the only effect is an increase in the quota rent. As a result,ph and
mh remain unchanged and a change in the ad valorem in-quota tariff has
no impact on the quality composition of imports.
• If the high-quality quota level varies:
When the equilibrium is in-quota, an increase in the high-quality quota level has no effect on the relative quality of imports. When the high-quality quota is binding, if the quota level increases, the high-quality imports increase as well. The expansion of ¯qh reduces tm and then ph since ∂t∂qm¯h <0. Provided
that ml and mh are gross Marshallian substitutes (σ > 1), a reduction
of ph implies a reduction of ml. So, when ¯qh increases, there is a quality
∂mh/ml ∂q¯h = (plw(1 +t) +T) σ λσ lR (λσh(phw(1 +th+tm))1−σ+λσl(plw(1 +t) +T)1−σ)2+ (1−σ)λσh q¯hphw (phw(1 +th+tm))σ ∂tm ∂q¯h >0 if mh = ¯qh. (3.18)
When high-quality imports exceed the quota there are two possible results. If the increase in the quota level is such that the quota is still lower than the high-quality equilibrium value, the result is merely a change in the allocation of high-quality imports in and out of quota, but the import mix is not affected. If the new quota level is larger than the initial high-quality equilibrium, the new equilibrium will be either at-quota or in-quota. In both cases mh increases while ph and ml decrease, resulting in a quality
upgrading through the same mechanisms as for the previous result (see (3.18)).
In brief, starting from an out-of-quota equilibrium, a quota increase can result in two possible outcomes: no quality effect if the equilibrium remains out of quota; or a quality upgrading if the new equilibrium shifts to either at-quota or in-quota equilibrium.
[INSERT TABLE 3.4.3]