International Trade Policy Reforms and their Simulation

This paper is concerned with proposals for multilateral reforms of tariffs taxes and quotas that are Pareto-improving in welfare when the reforms are not accompanied by any income transfers between countries. Starting from a tariffand quota distorted competitive equilibrium for a model of a trading world consisting of an arbitrary number of nations engaged in international trade in an arbitrary number of commodities, we examine the possibilities of undertaking gradual multilateral reforms of tariffs and quotas to attain a strict Pareto improvement in welfare. Since we exclude the use of international transfers of income as a redistributive device, the trade policy reforms are required to simultaneously create efficiency gains and to redistribute them to attain a strict welfare improvement for all countries. In addition to providing conditions that can be numerically checked in order to determine whether a particular direction of change in policy parameters is a Pareto improvement, we also give concrete reform recommendations that can result in welfare improvements. Unfortunately, these policy reform recommendations are shown to yield Pareto improvements in welfare under a very strict sufficiency condition on consumer preferences. To evaluate the likely importance of this sufficiency condition for the Paretoimprovement outcome, a series of numerical simulations are undertaken. Given the numerical values for the parameters of the technologies and preferences in each country of our model, together with the policy (tariffs and quotas) parameters, the competitive equilibria are solved numerically. The specific policy reforms are then evaluated and their welfare implications obtained. In short, the restrictiveness of our sufficiency condition used in the theoretical analysis is evaluated using simulation methods. The results suggest that the strict normality assumption on preferences is a rather weak sufficiency condition.