including free international trade in final products and intermediate inputs (though not usually in productive factors). In the absence of distortions and if all factors are perfectly mobile between sectors, this is the optimal policy setting.<sup>16</sup> An alternative perspective is to measure it against the first-best policy instrument for achieving the particular ‘non-economic’ objective of society that the tariff is ostensibly targeting (although this is difficult if several objectives are being targeted simultaneously). An additional literature measures the benefits of liberalizing markets<sup>17</sup> , in which case the reform usually is measured against either current policies or what those policies otherwise would be. The latter is appropriate if, for example, protection was rising over time and the measurement of its effects was calibrated for a future year. If the experiment involves bilateral or multilateral reform, any terms of trade changes associated with other countries’ reforms need to be included in the calculus.

Three of the early attempts to measure the cost of protection were for sectors where rates of protection were very high by international standards: Australian manufacturing (Brigden et al. 1929), German agriculture (Gerschenkron 1943) and Canadian manufacturing (Young 1957). In critiquing the Brigden study, Corden (1957) developed what might be considered the first comprehensive methodology which, with the seminal paper by Johnson (1960), has provided the foundation for subsequent empirical analysis of the cost of protection in both partial and general equilibrium.

The cost of tariff protection consists primarily of a production component and a consumption component (in partial equilibrium the Harberger (1959) deadweight welfare cost triangles). Such measures are an improvement over earlier calculations that measured just the cash value of the producer subsidy equivalent or consumer tax equivalent. They usually ignore the costs of lobbying for and then administering the tariff, and of ‘leakages’ in such forms as corruption at the customs post and smuggling. The vast majority of empirical studies also usually assume that perfect competition and constant returns to scale operate, thereby underestimating the cost of protection in so far as imperfect competition and increasing returns are present. Nonetheless, this basic approach has been the workhorse of countless partial equilibrium studies of the cost of protection and, as the popularity of studies such as those sponsored by the Institute for International Economics shows, they have great appeal to the policy community. That appeal no doubt is partly because the approach is relatively easy to explain.

When import quotas or voluntary export restraints (VERs) are used as the protective instrument instead of a tariff, the costs of a given level of protection are higher. What would have been the tariff revenue becomes the quota rent which, in the case of VERs, is transferred to the foreigner. In the numerous cases where large countries are imposing such quantitative trade barriers, there are also terms of trade effects to consider (as there are also with a tariff). They can lead to efficiency losses for the exporting countries that more than offset the quota rent transfer -- as found in several of the US studies of VERs surveyed by Feenstra (1992). They also lead to extra losses (a) if the quotas are volume based because that measure encourages the exporting of more-processed or higher-quality products within the product group for each quota, (b) if the quotas are allocated (rather than auctioned) but not to the lowest-cost exporting countries, (c) if the licences to fill an exporting country’s quota are allocated (rather than auctioned) but not to the lowest-cost firms in that country, (d) if the quota leads to additional lobbying, in this case for an allocation of the quota, that erodes the

> 16 However, to the extent trade in factors is complementary with rather than a substitute for trade in products, the counterfactual should be broadened to include unrestricted factor trade too. Compare, for example, Mundell (1957) with Markusen (1983); but note that the outcome when both product and factor trade are opened up is not obvious (Michaely 2003).

> 17 Major efforts to examine the effects of trade liberalizations in developing countries include Bhagwati (1978), Krueger (1978), and Michaely, Papageorgiou and Choksi (1991).

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