How Trade Liberalizations Affect Productivity

Most real-world trade liberalizations decrease tariffs and increase quotas without completely abolishing them. We ask how decreases in tariffs and increases in quotas affect productivity in an economy with monopoly rights in the import-competing sector. We show that a reduction in a tariff can increase productivity because it improves the efficiency of the resource allocation. This effect is standard and it is small quantitatively. We also show that an increase in a quota increases productivity both due to the standard effect and to the effect on the choice of working practices and productivity under monopoly rights. This second effect is not standard and it is large quantitatively. Thus, our model predicts that an increase in a quota have a much larger quantitative effect on productivity than an equivalent decrease in a tariff. We provide supporting evidence for this prediction from the recent trade liberalizations in Brazil, Chile, South Korea, and Mexico.