A new approach to evaluating trade policy
The authors introduce a new measure, the
            Trade Restrictiveness Index, to measure the restrictiveness
            of a system of trade protection. They propose an alternative
            to the commonly used ad hoc indexes of trade
            restrictiveness, such as the trade-weighted average tariff.
            That measure has no welfare-theoretic basis and can be
            highly misleading, in practice. For example, the complete
            exclusion of trade in a commodity would usually lower the
            index, because its trade weight would fall to zero. The
            authors show that their proposed index is soundly based in
            standard welfare economics. When trade is restricted by
            tariffs only, the Trade Restrictiveness Index equals the
            uniform tariff, which would be equivalent to the existing
            system of tariffs in the sense of yielding the same level of
            aggregate welfare. But tariffs have declined in importance
            in recent years as a means of restricting trade, so the
            measure must also be able to take account of quantitative
            restrictions on trade. Where quotas are the only form of
            restriction, this is easy: the Index equals the
            equiproportionate reduction in permitted import volumes that
            is welfare-equivalent to the initial structure of quotas.
            When both quotas and tariffs are present, the Index can be
            defined as the uniform tariff factor (one plus the uniform
            tariff) and uniform import reduction factor which would
            yield the same level of welfare as the initial system of
            trade restrictions. The authors show how this can be
            formulated, noting that if a single good is subject to both
            a binding quota and a tariff, it should be viewed as
            quota-constrained - the tariff serves merely to ensure that
            some of the rents accrue to the importing country. These
            theoretical derivations permit a major synthesis of the
            theory of protection and suggest how the results of
            computable general equilibrium models might be presented to
            make them internationally and intertemporally comparable.
            But in most cases such a model is not available and, even if
            it were, it would not be sufficiently disaggregated to deal
            with a complicated system of trade protection. So the
            authors present some empirical short-cuts that can be
            adopted for estimating changes in the Index. Chief among
            these is the assumption that the goods under consideration
            are separable from others in an appropriate
            general-equilibrium sense. This can provide a rigorous
            foundation for a form of partial-equilibrium analysis (the
            consideration of a subset of markets in an economy). They
            also show how the Trade Restrictiveness Index can be adapted
            to allow for different forms of rent sharing and for a
            country's ability to influence its terms of trade.
            Applying these empirical methods to exports of textiles and
            apparel from Hong Kong to the United States, the authors
            find that the protective system becomes more restrictive for
            both countries over the seven years considered (1982-88).
            Increased trade restrictiveness does not necessarily mean
            that quotas have been tightened. When there is economic
            growth, constant or even rising import quotas might still
            amount to a tightening of protection. Results based on the
            trade-weighted average of "tariff equivalents"
            (the gaps between Hong Kong and U.S. prices) diverge
            significantly from those of the Trade Restrictiveness Index.
            The two measures have opposite implications for the change
            in trade restrictiveness for two-thirds of the observations.