Tariffs and Quotas in World Trade: A Unified Variational Inequality Framework

Abstract

In this paper, we develop a unified variational inequality framework in the context of spatial price network equilibrium problems that captures world trade policies in the form of tariff rate quotas, which are two-tiered tariffs, and that have been applied in practice to numerous commodities. The spatial price network equilibrium model allows for multiple supply markets and multiple demand markets in different countries as well as multiple transportation routes. The model is qualitatively analyzed and also related to models with trade policies such as ad valorem tariffs and strict quotas. A case study on the dairy industry focusing on the United States and France is presented to illustrate the modeling and computational framework with impacts of stricter quotas, higher over quota tariffs, as well as additional transportation routes assessed. The numerical examples reveal that although domestic producers can gain under tariff rate quotas, consumers may experience higher prices. Given the relevance of tariffs to global trade in the world today and discussions concerning the impacts, the framework constructed in this paper is especially timely.

Keywords: networks; tariff rate quotas; spatial price equilibrium; dairy industry; variational inequalities