WELFARE COSTS OF U.S.
OUOTAS IN TEXTILES,
STEEL AND AUTOS
Jaime de Melo and David Tarr*
AbsIruct—this paper quantifies the welfare effects and re-
source shifts that would occur if U.S. quantitative restrictions
(QRs) in textiles, steel and autos were removed. Estimates are
derived from a static ten-sector general equilibrium model of
the U.S. economy. The welfare loss from the ORs is estimated
at approximately U.S. $20 billion (1984 dollars) Due to the
high rent transfer component of ORs (about 75Wo), the aver-
age across-the-board tariff equivalent of QRs (in terms of
welfare costs) is estimated at about 209c, a rate which pre-
date,s the early days of multilateral tariff reduction.
I. Introduction
R ECENTLY, several studies have estimated
the costs of U.S. special protection arrange-
ments.’ All these studies, using a partial equilib-
rium (PE) framework, provide a useful range of
estimates of the costs of non-tariff protection.
These studies are especially valuable when taken
individually because then the assumptions of PE
analysis provide an adequate approximation of
reality. But, as we quantify below, when the costs
of all restrictions are taken together, the underly-
ing assumptions are much less tenable. In partic-
ular, the general equilibrium (GE) approach used
here accounts for three effects omitted by PE
estimates. First, the inclusion of a balance of
trade constraint (expressed in world prices) re-
moves an upward bias present in PE analysis.
Second, the effects of income transfers to and
from the rest of the world are properly accounted
Received for publication January 12, 1989. Revision ac-
cepted for publication November 16, 1989.
* T he World Bank, University of Geneva, and CEPR; and
the World Bank, respectively.
This is a revised and shortened version of de Melo and Tarr
(1985) which extends an earlier study by Tarr (1989). We
thank Morris Morkre and two referees for comments. The
views are those of the authors, not those of the World Bank.
We thank Julie Stanton for extremely valuable research assis-
tance, Maria Ameal for logistic support and Soren Nielsen for
computer support.
Among the most widely known studies that provide esti-
mates of the welfare costs of non-tariff barriers (NTBs) in the
United States are individual sector studies for textiles IMorkre
(1984); Tarr and Morkre (1984); Cline (1987); Keesing and
Wolf (1980); for automobiles (Winston and Associates (1987);
Tarr and Morkre (1984); Feenstra (1984, 1985, 1958);
Dinopoulos and Kreinin (1988)); and for steel (Tarr and
Morkre (1984)). Perhaps the most comprehensive recent esti-
mates come from the 31 case studies of special protection by
Hufbauer, Berliner and Elliott (1986).
Copyright fi 1990
CoDvriaht 2001 All Riohts Remen on
for so that, unlike in the PE analysis, capturing
quota rents affects resource allocation. Third,
economy-wide resource constraints and in-
terindustry linkages provide a more accurate esti-
mate of welfare and sectoral employment effects.
This paper deals with the problems of PE analysis
by presenting estimates from a static ten-sector
computable general equilibrium (CGE) model of
the U.S. economy calibrated to the year 1984 when
quantitative restrictions (QRs) in tex- tiles and
autos were in effect, and those on steel were in
negotiation. To our knowledge, the treat- ment of
OR-associated effects here is more satis- factory
than in previous CGE applications. While the
U.S.-negotiated voluntary export restraint (VER)
on automobiles has expired, demand in the
United States for protection through non- tariff
barriers (NTBs) remains strong and may be on the
rise. A new round of estimates of the costs
of protection is therefore all the more welcome.
The remainder of the paper is organized as
follows. Section II outlines the model. Section III
details the sources of estimates of premia on
preexisting QRs in 1984 and the sources for the
parameters describing demand and supply elastic-
ities. Estimates of the welfare and employment
effects of QR removal are presented by industry
and in the aggregate in sections IV and V. Con-
clusions follow in section VI.
Il. Model Outline°
The simulation model is a static CGE model
with assumptions that correspond closely to those
followed by the partial equilibrium estimates cited
above, namely, a neoclassical perfect-competition
Walrasian model in which a representative con-
sumer maximizes utility subject to a budget con-
straint, a:omistic producers minimize costs, and
the government redistributes tax revenues from
trade policy in a lump sum. The economy has a
fixed endowment of labor and capital and faces
A full description of the model is contained in the ap-
pendix to de Melo and Tarr (1988) and is available from the
authors upon request.
[ 489 )
490 THE REVIEW OF ECONOMICS AND STATISTICS
an exogenous balance of trade constraint ex-
pressed in world prices. Because we are inter-
ested in the static welfare costs of protection, we
abstract from investment, thereby simplifying the
welfare analysis. The components of demand,
therefore, include only consumer and intermedi-
ate demand.
Under these assumptions, it is clear that the
welfare changes due to a change in trade policy
are the usual production and consumption costs
of protection referred to in the literature on the
costs of protection. Our measure of the welfare
change due to a policy change is given by the
equivalent variation (EV) measure associated
with the Stone-Geary utility function describing
the representative consumer’s preferences, i.e.,
EV —— C JR(p', y'), po — C yU(po yo) pop
where C is the cost function, IU is indirect utility
which depends on prices and income, p is the
vector of final goods prices, and superscripts 0
and 1 refer to the equilibrium before and after
the counterfactual trade policy experiment. If EV
is positive, the consumer is better off as a result
of the policy shift.
The structure of the ten-sector model is as
follows.' Commodities supplied (or purchased)
abroad and domestic commodities sold on the
domestic market are imperfect substitutes. This
assumption of product differentiation is com-
monly used in applied general equilibrium analy-
sis and is also adopted in most of the PE studies
alluded to above. On the export side, the assump-
tion of product differentiation is reflected in the
constant elasticity of transformation (CET) func-
tion between domestic and foreign sales. 4 A
symmetric functional form is specified for inter-
mediate demand by sector (see below). The as-
sumption of product differentiation allows for the
cross-hauling observed in trade statistics.
Production possibilities are parametrized by as-
suming constant elasticity of substitution (CES)
functions for value-added and Leontief functions
between intermediates (as a whole) and value-
added and across intermediates. However, within
The ten sectors are agriculture (1), food (2), mining (3),
textiles and apparel (4), autos (5), steel (6), consumer goods
(7), other manufacturing (8), traded services (9), and non-
traded services (10). All sectors are traded with the exception
of sector 10. See Tarr (1988) for details on aggregation.
The CET was first introduced by Powell and Gruen (1967).
WELFARE COSTS OF
QUOTAS
Sector
Copyright O 2001 All Rights
each sector, intermediate demand is a CES func-
tion between the domestically produced interme-
diate and the competing foreign intermediate. To
give an example, no substitution is allowed be-
tween purchases of steel and other manufactur-
ing intermediates, but substitution in purchases is
allowed between domestically produced and for-
eign produced steel when their relative prices
change as a result of a change in trade policy.
Likewise, in consumption demand, the demand
system derived from the Stone-Geary utility indi-
cator allows for non-unitary income elasticities of
demand and non-zero cross-price elasticities of
demand between domestically produced and for-
eign produced consumer goods.
Finally, we note that in previous single-country
partial equilibrium estimates, authors have invari-
ably assumed that the United States is a small
supplier and demander in world markets. In our
preferred estimates, we retain this assumption
except for the supply of auto imports and the
demand for agricultural exports. However, be-
cause of the controversy about the importance of
terms of trade effects reported in multi-country
models (e.g., Whalley (1985), Deardorfl and Stern
(1986)), we report separately results under the
assumption that the United States possesses gen-
eralized monopoly and monopsony power.
The description of the model is complete ex-
cept for our treatment of QRs. In the United
States, for the sectors considered here, there are
no government controls or direct quota alloca-
tions with resale prohibition. Hence, unlike the
case of many QR allocation schemes in develop-
ing countries, the U.S. system of ORs allows for
market-clearing prices. Since in 1984 quotas were
already in place in autos and textiles, we assume
that observed purchases were at the premia-
inclusive prices in that year. (The estimation of
premia is discussed in section III.)’
III. Elasticity and Premia Estimates
Considerable eflort was devoted to a “parame-
ter search” for elasticities of demand and supply
and to constructing premia estimates for existing
Our calibration procedure assumes that the prices and
quantities observed in 1984 correspond to an equilibrium of
the U.S. economy with normal capacity utilization and in
which the only distortions are the ORs and tariff on imports.
This may be viewed as a strong assumption but it is implicit as
well in most other estimates of the costs of protection.
491
TABLE 1. —E s ici
S
rECI FICATION
(CENTRAL CASE)
 Transformation
Column Notes Substitution Substitution Domestic/Export
lasticity of Intermediates Capital/Labor Sales
Elasticity (1) (2) (3) (4) t5) (1) (2) (3) Price Elasticities
of Final Demand Premia
Elasticity Domestic Imports Rates
(4) (5) (6)
Agriculture a c e k f 1.4 0.6 4.0 0.75 0.8
Food a c e f f 0.3 0.8 3.0 0.90 1.1
Mining b b e j f 0.5 0.8 3.0 0.50 1.0
Iron and Steel a d e i f 3.0 1.0 3.0 1.0 1.4
Motor Vehicles a c e h h 2.0 0.8 3.0 1.2 1.1 31.9Wo
Textiles and Apparel a c e I f 2.6 1.0 3.0 0.4 3.9 40.5Wo
Other Manufactures a c e f f 3.6 0.8 3.0 1.5 1.8
OtherConsumer a c e f f 3.2 0.8 3.0 1.9 2.4
TradedServices b c e g g 2.0 0.8 0.7 0.5 0.6
Non-traded Services b g 0.8 0.5
Note CES and CET functions imply that the corresponding elasticities of substitution (transformation) correspond to compensated import dema n‹l
(export supply) elasticities
All price elasticities of demand are defined as positive numbers -or premia estimates, see text. Column notes correspond to the sources from which
estimates are interpolated. For interpolation deta ils see Tarr (1988)
(a) Shiells, Stern and Deardorfl (1986); (b) Dixon ct al. (1982); fc) Caddy (1976); (d) Hekman (1978), (e) own estimates, (f) Stern, Francis and Schumacher
(1976), tg) Hout hakker and Taylor (1970); (h) cevinsohn (1988); (i) Cr andall (198 I ), fy) Bohi and Russell (1978), (k) USDA (1984), (1) Hufbauer, Berliner and
Elliott ( 1986)

QRs in textiles and autos. We discuss these briefly
below. (Tarr (1989, chaps. 5 and 6) is devoted to a
detailed discussion of how these estimates were
derived.)
Table 1 presents all elasticities and our con-
structed estimates of pre-existing premia. These
elasticities correspond to the “central” elastici-
ties. (When we report in table 3 the likely range
of the welfare effects of removing all trade re-
strictions, we are reporting results from the “low”
and “high” elasticities that are derived from the
“central” elasticities in table 1 by subtracting and
adding, respectively, a standard deviation. 6 ) Be-
cause much econometric work has been done to
estimate the capital/labor substitution elastici-
ties, we are fairly confident about the accuracy of
these elasticities. We are also fairly confident of
the import demand elasticities, for which a num-
ber of estimates are available. Less confidence
can be placed on export supply elasticities. How-
ever, because these latter elasticities enter only
indirectly into our estimations, we have found
As the sources for table 1 detail, the estimates were
obtained from many studies. These studies generally provide
standard errors of estimates. For those elasticities taken from
Stern, Francis and Schumacher, the high and low estimates
are generally the high and low estimates from their survey,
which are not based on standard deviations. In a few cases the
high and low estimates are obtained by doubling and halving
the central estimate. See Tarr f1988, ch. 5) for details.
that our welfare estimates are quite insensitive to
considerable changes in their values.7
For the premia rate estimates for apparel (ex-
pressed as a percentage of landed U.S. import
price inclusive of tariffs), we have relied on
Hamilton (1988). Hamilton’s data are based on
the sale of rights to export apparel products to
the United States. His data give an estimate of
the quota rents captured by Hong Kong. In order
to understand the problem of premia rate estima-
tion, it is crucial to recognize that the existing
Multifiber Arrangement (MFA) allows a number
of marginally inefficient foreign suppliers to sell
in the United States. If the MFA were abolished,
many of them would be squeezed out of the U.S.
market by competition. The quota premium rate
earned by these inefhcient suppliers is less than
the quota premium rate paid by U.S. consumers
as a result of the MFA. Thus, we had to deter-
mine the marginal supplier to the United States if
the MFA were abolished. Data in Hamilton
(1988) allow us to determine that Hong Kong,
which had a quota premium rate of 479c for
apparel sold to the United States in 1984, or a
supplier more
7
For example, doubling (halving) the elasticity estimates in
column (3) increases (decreases) our estimates of the welfare
gains with the central elasticity estimates from US$22.0 billion
(with infinite foreign trade elasticities) to $22.1 ($22.9) billion,
respectively, or + 0.5 to.
492 THE REVIEW OF ECONOMICS AND STATISTICS
efficient than Hong Kong, would be the marginal
supplier if quotas were removed.'
The United States is much more competitive in
textiles than in apparel. Consequently, for textiles
we take 5% as the premium rate, which is much
more conservative than the 159c proposed by
Cline (1987, p. 167). A positive rate is indicated,
however, based on data in a study by the U.S.
International Trade Commission (1987). For au-
tos we relied on the quality-adjusted premia esti-
mates of Feenstra (1988) for Japanese car im-
ports by the United States. For European car
imports, we relied on the quality-adjusted price
increase of European cars sold in the United
States estimated by Dinopoulos and Kreinin
(1988). Our resulting premia estimates, which are
weighted averages, are 41% for textiles and ap-
parel and 32% for autos.9
N. Welfare Cost Estimates
The costs of QRs reported in tables 2 and 3
below are based on estimates of the premia that
accrue to the exporting countries rather than to
the United States. One can therefore distinguish
two components of the costs of the QRs: (1) the
income or rent transfer to foreigners and (2) the
distortionary cost due to the usual consumption
and production costs of protection.' 0 Table 2
summarizes these costs for each of the three
industries: textiles and apparel, autos and steel.
Since the restrictions on steel—which resulted in
approximately a 15% reduction in imports of
steel starting in early 1985—were not imple-
mented until 1985, we obtain the estimates for
steel by reducing intermediate and final con-
8
We note that estimates of quota premia, in both textiles
and automobiles, vary from year to year. We obtained esti-
mates of quota premia for 1984, the year for which we
benchmarked the model. Thus, our estimates apply to the
conditions prevailing in that year. For other years, the premia
rates and our cost estimates may differ.
If the marginal supplier is more efficient than Hong Kong,
our premium rate estimate is conservative and the associated
welfare gain estimate is downward-biased. There is evidence
that, during the quota era, U.S. dealers of Japanese autos
captured about $550 per vehicle in rents above those rents
captured by foreigners. This would correspond to a higher
premium rate on autos of 43to, of which foreigners capture
80Wo of the rents. We shall provide separate estimates for this
scenario.
’0 In the cases where there are terms of trade effects, the
estimates of the distortionary costs of protection are reduced
because the terms of trade effects partially offset the distor-
tionary cost component of the ORs.
Copyright 2001 All Rights
sumption of imported steel products by 159c from
the observed levels in 1984. This restriction re-
sults in a 7Wo premium on imported intermediate
steel products. The employment hgures in col-
umn 2 are only for the industry subject to quota
removal; the total economy-wide relocation of
workers is reported in column 3. This latter mea-
sure is a summary of interindustry effects (see
Deardorff and Stern (1986)).
The figures in table 2 reveal that the largest
welfare costs are due to the ORs in textiles and
apparel. This may seem surprising since that sec-
tor is smaller than autos, and imports are three-
fourths of auto imports in value (including pre-
mia). Also, the proportion of the total welfare
costs due to distortionary costs are much higher
in textiles and apparel than in autos even in the
case of an infinite elasticity of import supply in
autos. This is so because the premium rate is
higher and because the price elasticity of demand
for textiles and apparel is almost four times higher
than the corresponding elasticity for autos. Fur-
thermore, the relative homogeneity of domestic
and imported steel reduces the production costs
of distortion.''
Because elasticity estimates are not precise, we
report in table 3 a range of welfare gains from
removing all QRs simultaneously for the cases of
low, central, and high elasticities. Because the
marginal benefit to the economy of an income
transfer is a decreasing function of demand and
supply elasticities, the welfare gains from captur-
ing rents from foreigners is higher in the low
elasticity case than in the high elasticity case. Of
course, these estimated welfare gains due to the
The United States imposes ORs in other sectors in addi-
tion to textiles, autos and steel. For example, Hufbauer,
Berliner and Elliott (1986) reported QRs in book manufactur-
ing, motorcycles, shipbuilding and maritime industries, sugar
and food products containing sugar, cheese and other dairy
products, pean uts and meat. We have simulated the effects of
removing all the QRs in the economy by assuming a high
(low) premia rate (tariff equivalent) of the ORs (with rents
going to the foreigners) of 5to (2.5Wo) in agriculture; 3Wo
(1.5 to) in other manufactures, other consumer goods and
food; and zero in the remaining sectors. Given these premia
rates, the welfare gain from removing all QRs, including those
in textiles, autos and steel, is $27.6 billion in the high and
$24.0 billion in the low premia rate cases. These estimates of
the benefits of removing all QRs, however, can only be
considered suggestive because, unlike the case of our esti-
mates of the premia rates in textiles, autos and steel, we have
not done a careful estimate of the premia rates in the remain-
ing sectors of our model.
 WELFARE COSTS OF QUOTAS 493
TABLE 2.—WELFARE COSTS ANn Evrrovvnsi Errnc+s or ORs:
I>oIVI DUAL S ACTORS

Employment
Change in the Economy- Vide
Welfare“ Industry Losing Gain Employment
Its OR Relocation'

Textiles and Apparel

Remove ORs 11.92 — 157.2 157.2
(0.15)
Capture Rents 6.05 — 3.05 28.35
from Foreigners (0.03)
Autos
Remove QRs 7.50 —1.2 1.3
t9.10) t0.001)
Capture Rents 7.95 +1.3 37.2
from Foreigners (7.92) (0.035)
Steel
Remove ORs 0.86 — 20.7 22.3
(0.021)
Capture Rents 0.74 — 0.1 3.5
from Foreigners (0.003)
Note. Estimates based on central e las treaties, with infi nite fore ign t rade ela st deities. except for ci„„, - 5, a nd — 4, where •)„,t, is ihe
foreign elastics iy of impcirt su pply of autos and ep¿, is the foreign elasticity of demand for exports of agriculture
" Welfare is the ñ U measure expressed in billions of 1984 U S dollars Numbers in parentheses are based on infin ite foreign trade e last ilities in
all sectors
' Employment is expressed in t housa nds of work-years
One- half of the sum of the absolute val ue of the employment changes expressed in thousand work-years The nu mbers in parentheses a re the
percentage of employees in the economy who must relocate For example, IU I fi) means that fifteen-hundred ths of 1*Zc of the economy’s employees
must relocate
If I J S dealers of Japanese autos capture additional rents Iexplained in footnote 9), the welfare ga in from removing O Rs is $ ? 57 I illion with 1
nfinite tore lgn trade elasticities

T Bt E 3. —WE LFA RF COSTS OF O RS AN TA R IFr P ROT I-M ION

Strong Foreign Preferred Foreign Trade

Elasticities Trade Elasticities
Low Central High Central
Elasticity Elasticity ' Elasticity" Elasticity'

Remove QRs 20.5 20.3 21.6 15.0

(22.0)
Capture Rents from 1fi.b 14.9 14.5 15.0
Foreigners (retain ORs) (14.5)
Eliminate Remaining
Tariff Protection 0..33 0.57 0.90 — 4.3
(after QR removal) (0.94)
Note: Welfare iS the AV meazure expressed in billions of 1084 U S dollars Let c/- e la8t city cf dem And fur
exports oflecor, and = e!alt ,Sof upply ofcnpo,ts *n ›tc1or ;
The centta eIasnc1ye›nma1es dre not hehveon chs hgn aud lopola,wc›yos1‹mue,, becausepe nrae a new

- 4, e/„„, ' ñ Small country a'•8umptlon for all ct he:r export demand and lmpcrt supply e I a ,tdeities
Results in pa rent heses are the welfare estimates with infinite toreign trade e lasticit res
e'' for cxpcir ts = 3 and e,‘ of supply of imports — 4 whe re i ranges over all traded sectors.

capturing of rents from foreigners are overesti- Insofar as removing QRs leads to increases in mates to the extent that
rent-seeking activities agricultural exports and auto imports, the U.S. dissipate them. For this reason, an auction quota terms
of trade will decline and hence the welfare mechanism is superior to a direct allocation of gain will be less. For the
central elasticity case, quota rights to imports. Thus our estimate of the the welfare gain is $20.3 billion, of which $5.4
annual cost of ORs in these three industries for billion is the distortionary cost component of 1955 protection levels
is between $20 billion and QRs. Obtaining the quota rents is a pure income
$22 billion. transfer from the rest of the world to the United
494 THE REVIEW OF ECONOMICS AND STATISTICS

States, and its effect is a real appreciation of the

dollar (about 1%) which is accompanied by a
small improvement in the terms of trade.
It is conceivable that the United States would
have monopoly and monopsony power in all sec-
tors in which it trades. Although this seems un-
likely because the U.S. market share is usually
small in its main import and export markets, we
have experimented with generalized terms of
trade effects across all sectors for the central
elasticity case. In column 4 of table 3, we assume
constant import supply elasticities of 4 and con-
stant export demand elasticities of 3 for all traded
sectors. The gains from QR removal are smaller,
but still substantial ($15.0 billion). However, in
this case the terms of trade effects (from ex-
panded trade volume at higher import prices and
lower export prices) exactly offset the distor-
tionary costs in total OR costs. Finally, adding
unilateral tariff reduction now results in a welfare
loss of $4.3 billion because of the dominating
terms of trade effect, a result similar to those
found in the global simulations mentioned above.
Evidence of pure profits in autos and of
economies of scale in autos and, to a lesser ex-
tent, in steel raises the question of the extent to
which our estimates would be affected by imper-
fect competition and economies of scale in autos
and steel. We view the empirical effects of imper-
fect competition and economies of scale as off-
setting. Due to the fact that costs will increase,
OR removal will result in lower benefits than we
have estimated to the extent that there are unre-
alized economies of scale in autos and steel.
Following Krishna (1983), however, ORs should
be viewed as a practice facilitating pricing above
competitive levels. QR removal, therefore, will
induce a reduction in oligopolistic pricing prac-
tices and lead to greater benefits (relative to our
estimates) from a reduction in the distortion costs
of these pricing practices. Thus, we do not know,
a priori, the direction of the bias in our estimates
due to imperfect competition and economies of
scale. The issue, however, is clearly worthy of
further investigation.
In the introduction, we said that PE estimates
are upwardly biased because they fail to include
the balance of trade constraint. An order of mag-
nitude of the diflerence between PE and GE
estimates due to this effect is obtained by solving
the model with a fixed real exchange rate and
hence an endogenous trade balance. This would
correspond to what is typically done in PE esti-
mates, which implicitly assume that the real ex-
change rate is unchanged as a result of QR
removal and that resulting import increases need
not be compensated by increased exports (or re-
duced imports from other sectors). For the cen-
tral elasticity case, removing all ORs would lead
to a trade balance deterioration of $12.1 billion and
an EV estimate of $33.9 billion. This esti- mate is
about one and two-thirds times the estimate
obtained when the balance of trade con- straint is
properly taken into account. Economy- wide
welfare costs estimates derived by adding up
individual industry PE estimates are likely to be
significantly upward-biased.
Our welfare cost estimates are significantly
higher than previous GE estimates.' 2 This is so
for several reasons. First we properly account for
the $14.9 billion transfer associated with the U.S.
system of QRs." Thus, even with generalized
terms of trade effects which are stronger than we
believe reasonable,’4 the QRs cost the U.S. econ-
omy $15 billion. Second, in comparison with most
previous PE and GE estimates, we have benefited
from the detailed work on premia estimates by
Feenstra (1988), Hamilton (1988) and Dinopoulos
and Kreinin (1988), which are higher than previ-
ous estimates.
V. Employment
Table 4 gives estimates of the employment
effects of simultaneous removal of ORs in tex-
tiles, autos and steel for the central elasticity
case. The simultaneous removal of ORs also
points out the conflicting worker interests across
the three industries subject to QRs. While the
steel and textiles and apparel sectors would lose
almost as many jobs when all QRs are removed
' 2 For example, Whalley (1985, table 10.2) estimates welfare
losses from unilateral U.S. removal of non-tariff barriers and
tariffs. Deardorff and Stern (1986, table 4.6) obtain small
welfare gains.
'" Most previous GE studies of the costs of protection (e.g.,
Deardorff and Stern (1986) and Whalley (1985)) that have
dealt with ORs have done so in the context of global models
that treat QRs by their tariff equivalents without including the
associated rent transfer that occurs with the U.S. ORs.
" In addition, Brown (1987) has shown that the structure of
many previous GE models has required excessive estimates of
terms of trade effects. See also de Melo 11986) and Deardorff
and Stern (1986, p. 41).

WELFARE COSTS OF 495

OUOTAS

as when they are removed in their sector alone, currently with the VER on autos. This is so because
the auto sector gains 1,700 jobs when ORs on steel, an important input into auto pro- duction,
steel and textiles and apparel are removed con- becomes cheaper and because the in- come
Copyright O 2001 All Rights
elasticity of demand for autos is high. Both effects
benefit the domestic auto industry which expands
even when QR protection is removed.
Given that QR protection is obtained through
the political process, one can argue that the U.S.
Congress has decided to value a job in the pro-
tected sectors more highly than a job in other
sectors. In our experiment, 172,000 jobs in tex-
tiles and steel were protected by the QRs on the
three sectors at a cost of $20.3 billion. Hence, the
annual cost per protected job is about $118,000,
approximately 8 (3) times the average annual
total compensation of workers in the textile (steel)
industry.
If QRs are removed, displaced workers will
incur search, relocation, and retraining costs (see
Mussa (1978)). Net benefits from QR removal are
obtained by subtracting these costs. A proxy for
these costs is the discounted value of a displaced
worker’s earnings losses over a lifetime." This
measure allows us to estimate how much gainers
will have left after compensating displaced work-
ers for their earnings losses. Earnings losses for
displaced workers last approximately six years."
A conservative estimate of net benefits, NB, is
obtained as
5 EV — C, 1
NB ——
(1 + r)’
where ñK is the equivalent variation measure,
C,
is estimated earnings losses in year t, and r —— 7%
is the discount rate. (This estimate is conservative
since earnings losses are zero after six years,
while yearly benefits do not decay.) NB is $104
billion, with an associated benefit/cost of
65.
'‘ We call our estimate a proxy for these adjustment costs
because we have not incorporated into our model an endoge-
nous sector that moves resources, as suggested by the theoret-
ical work by Mussa.
" See Jacobson (1978). To be conservative, we measure
total compensation losses, which exceed earnings losses by the
amount of fringe benefits. Morkre and Tarr (1980, chapter 3)
discuss the merits of this measure and the alternative unem-
ployment cost measure.
Copvriciht O 2001 All Riahts Reserved
TABLe 4. —Eurcovunsi Errors or Reuovi o
ORs
in Autos, STEEL AND Tex+ires
(CENTRAL ELASTI CITv CASE)‘
(thousand jobs)
Agriculture 6.4
Food 0.8
Mining 4.5
Textiles and Apparel — 156.4
Autos 1.7
Steel — 13.5
Consumer Goods 17.5
Other Manufacturing 87. I
Traded Services 35.4
Non-Traded Services 18.fi
Foreign trade e lasticitieS defined in table 3
That is, for every dollar of earnings losses saved,
the economy loses $65.
VI. CORCIUSIO¥IS
Perhaps the most striking result is the high cost
of protection from NTBs relative to that from
tariffs. While this is repeatedly mentioned in pol-
icy discussions, few relative estimates are avail-
able. The figures in table 3 suggest that the
welfare cost of tariff protection is between 2%
(low elasticity case) and 4% (high elasticity case)
of the welfare cost of QRs in textiles, autos and
steel. Since there are other QRs in the United
States beyond those examined here, this estimate
is a lower bound.
An alternative way to evaluate the costs of
ORs is to ask what tariff structure would give the
same welfare loss as existing QRs in the three
sectors. In the central elasticity estimates (with
infinite foreign trade elasticities), the total wel-
fare cost is estimated at $22.0 billion (1984 dol-
lars), of which $7.2 billion is the distortionary
component. For that set of elasticities, moving
from the actual tariff structure to a uniform tariff
structure yielding the same (import weighted) av-
erage protection would represent a welfare gain
of $0.70 billion. (Removing tariffs altogether
would give a welfare gain of $0.94 billion.) Start-
ing from the existing tariff dispersion, to get the
distortionary cost element of ORs would require
multiplying each tariff by 3.6 times its 1984
value, which would amount to an average (import
weighted) nominal protection of 12.59r. Adding
the loss due to rent transfers would require multi-
plying tariffs by 7.4 times their 1984 value,
 496 THE REVIEW OF ECONOMICS AND STATISTICS
amounting to an average protection of 19.8Hpo 17
It is no exaggeration to say that, in terms of
protection costs, QRs are taking us back to the
early days of multilateral tariff negotiations, espe-
cially if one includes the rent transfer element.
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