Tariff-Rate Quotas, Rent-Shifting and the Selling of Domestic Access

Bruno Larue
Canada Research Chair in International Agri-food Trade,
CREA, Université Laval

Harvey E. Lapan
University Professor, Department of Economics,
Iowa State University

Jean-Philippe Gervais
Professor, Department of Agricultural and Resource Economics,
North Carolina State University

Tariff-rate quotas (TRQs) have replaced quotas at the end of the Uruguay Round. We analyze TRQs when a foreign firm competes against a domestic firm in the latter’s market. Our benchmark is the strategic rent-shifting tariff. We show that the domestic price-equivalent TRQ is a better instrument welfare-wise, as it can extract all of the rents from the foreign firm. We show that different pairs of within-quota tariff and quota can support full rent extraction. The implication is that reduction of the former and enlargement of the latter, holding the above-quota tariff constant, may have no liberalizing effects. The first-best TRQ and the strategic tariff generate different prices. When firms have identical and constant marginal cost, the first-best TRQ entails selling a subsidy to the foreign firm and forcing the exit of the domestic firm.