operational* The assumption that supply is a function only of its own price ignores the degree of substituability in the exporting
country between one export item and another which would tend to affect the supply conditions of these other items in a way similar to that of the commodity directly affected* A significant increase in the quant ity imported of one commodity will tend to increase the supply price of that commodity and any other commodity imported with a high substi tution relationship to it* This would tend to reduce the likely
differential between the optimum profit rates.
For most purposes therefore it will be sufficient to assume that the optimum condition is given by the equality of the margin of differ ence between import and home selling prices* This will in fact be the basis on which the next problem will be discussed*
It is now possible to consider the effect of an interchangeable quota and the effect of reducing the degree of
1.
For a formulation under considerably less restrictive
assumptions see Meade, Trade and Welfare: Mathematical Supplement, op.cit.. Chap* XX. It would be quite possible to construct a formula for the condition in the form of the optimum tariff formula discussed earlier (Chapter IV). Since the whole notion has only limited practical significance in the present context, and has been introduced simply to make use of the general principle in the subsequent discussion no attempt has been made to formulate a more operational condition.
interchangeability. Assume first that import licences are granted equivalent to the total amount of imports to be permitted, and that a licence may be used to purchase any type of import i.e. there is complete interchangeability over the whole import bill. Under these circumstances, importers will tend to import the lines permitting them the greatest profit and the rate of profit will t end to be equalised on all lines. Anything which interferes with this tendency tends to reduce the total welfare. The exposition may now be amplified without affecting the validity of the argument, by assuming that there are, under the conditions existing before the introduction of controls, only two imports, shoes and furs. If licensing controls are now introduced, whichever of the two items ätiows the greater margin of profit will,
attract the use of importers1 licences, providing there is complete interchangeability, until it is no more profitable to import furs than shoes.
Suppose now that shoes and furs are put into separate import licensing categories such that licences for the category shoes may be used to import only shoes and similarly for furs. If we assume that demand for furs in inelastic while that for shoes relatively elastic,
IT
This has specific relevance to the subdivision of the inter
changeable quota category, and the restriction of interchangeability of licences to items within the subgroup, in 1956. (See Chapt. Ill)• One of the purposes of this move was to reduce the extent of buying and selling of these licences and - though less specifically - to reduce the monopoly profits accruing to importers. The argument has more general relevance, however, to the methods of control as a whole.
the licences of the shoe importer will have been used for importing furs* Following the reduction of the interchangeability permitted, the licences that the shoe importer previously used for importing
furs will now be used to import shoes - or possibly not be used at all. Imports of shoes will go up and imports of furs down. Prices of furs will go up as will the importing profit rate, whereas both will go down in the case of shoes* The profit rate will now be different between the two goods and welfare will not be maximised*
In practice it may be that the monpoly profits of importers in total would have been reduced as a result of the reduced degree of interchangeability* In terms of the theoretical argument we cannot say whether a reduction in the interchangeability of licences will or will not cause a reduction in the total monopoly profits made by-
importers in the absence of a knowledge of the relevant demand elast
icities*
Suppose that in a competitive market situation with complete interchangeability the fur importer used all of his licences to import furs while the shoe importer imported some shoes but also imported furs, dividing his available licences between the two until the rate of profit on both was the same at the margin. If furs and shoes are now put into
TT
To simplify the analysis we have assumed that the fur importer imports only furs rather than both importers some of both furs and shoes. It is also implicit that it is still profitable for the shoe importer to import some shoes - it would be quite conceivable that it would pay him to import nothing but furs.
separate categories with no interchangeability the fur importers will be better off while the shoe importer will be worse off* The gain in total profit by the fur importer may or nor not exceed the loss
incurred by the shoe importer depending upon the relative elasticities of the two products.
If the assumption of a generally competitive situation is
relaxed to allow for rigidities in the business of imparting the shoe importer may offer his licences for sale to the fur importer. The fur importer may not wish to buy the same number of licences as, in the absence of these rigidities, it would have paid the shoe importer to use in the importation of furs. He may prefer to act as a monopolist in which case the number of licences he would be willing to buy would depend upon the point of intersection of his marginal cost curve - which would be determined by the price to be paid for the licence - and his marginal revenue curve.
Under the competitive situation the value of the licences which may be bought or sold will be dependent upon the importer profits which are available. If the licences for furs can only be used for
furs and no other licences can be used to import furs then there will be no sales of shoe licences for the import of furs. The fur importer will be able to offer a higher price to other fur importers for their licences; at a price equivalent to their expected profit on the actual import of the furs they will be indifferent between importing and selling the licence. In this situation they would in practice be more
likely to import the furs themselves for reasons such as maintaining trade connexions both with overseas suppliers m d domestic distribu tors. Therefore some reduction in the volume of licences actually
sold may have resulted from the subdivision of the interchangeable quota. The discussion above suggests that to the extent that the aim was to reduce importers1 profits the question of the volume of licences which changed hands was largely irrelevant.
There is no difference in principle when the situation analysed above: is extended, either to the reduction in the extent of the inter changeability in the interchangeable quota, or to the use of the
specific quota, which pay be considered as an interchangeable quota with the degree of interchangeability limited to one type of good.
The results reached so far may be generalised by concluding (a) that anything which prevents complete freedom of choice as to the actual goods imported, or which limits such freedom, will reduce welfare in the sense used here.
(b) the less the degree of interchangeability in the quotas, i.e. the more specific the use to which the licence may be put, the greater the variations will be in level of importers1 monopoly profit from item to item, and the greater the divergence from the optimum.
(c) we are unable to draw any conclusions as to which form of licensing control will minimise the redistribution of income to importers as a whole. Some presumption might be made that the greater the degree of interchangeability the less the total importer profits because of the
(d) the subdivision of the interchangeable quota in 1956 may have reduced the extent of the sale of licences but it need not have reduced the profits of importers as a whole.
Chapter I7!I
Empirical Investigation - General Aspects
The analysis in the three preceding chapters was designed to
show what we m a y expect, a priori, to result from the quantitative
control of imports. It was intentionally a highly simplified account
and deliberately avoided the innumerable qualifications which are
necessary when relating theoretical argument to the real world. D e s
pite the level of abstraction involved it offers an explanation of
the direction and nature of the forces set in motion by the controls
on imports; at the same time it suggests a great many questions to
which we might attempt to seek answers.
These questions relate to three interdependent but distinct aspects
of the control of imports. The first concerns the methods of control
and their implementation. The more general discussion of the theory
of the d i r e c t control of imports has been extensively in terms of t h e
price equivalent of a quantitative import control. Consequently, we
are interested in the extent to which the methods of control employed
deviated from a form of price adjustment which arguments of economic
efficiency indicate is preferable. We also need to recognise the limita
tions of these arguments and consider whether there may not be certain
advantages in practice attaching to the use of t h e method of direct
control which requires us to modify the strict application of the m arg
system as such was operated. We shall consider the question of the speed and accuracy of the controls in Chapter VIII. In Chapter IX we shall consider how the selection between sources and classes of imports was made, considering particularly the implications for the industries producing items directly competitive with imports-. The extent and nature of the protection received by the domestic import competing
industries during the periods when competition from imports was restrict ed by the controls will be examined in Chapter X, particularly the extent to which this was affected by the manner in which the controls were
operated. These three chapters, then, concern themselves primarily with particular features of the licensing system as such. These are not the only aspects of the system with which we shall deal but they are the ones to which it will be convenient to give separate consideration.
The second group of questions relates to the longer term, or broad ly structural, aspects of import control as such. Basically the question may be stated as whether the direct controls on imports made any contri bution to their own removal. In the discussion in ChaptersIV and V we
saw that there was no theoretical reason for this to happen; in terms of the static theoretical models the control of imports will make no contribution, and it is usual to assume that in practice they are likely, if anything, to accentuate the basic problem of imbalance by raising the
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