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A Note on Quantitative Restrictions and Capital Mobility

1976; American Economic Association; Volume: 66; Issue: 1 Linguagem: Inglês

1944-7981

Rodney E. Falvey,

Global Trade and Competitiveness

The link between international factor mobility and commodity trade has received some attention in recent years. In the main, this analysis has served to extend and tighten Robert Mundell's original demonstration of the basic substitutability between goods and factor movements in the standard trade model,' and to expand the discussion to examine the interaction between commodity and factor taxation.2 In the absence of impediments to factor movements (physical restrictions or differential taxation on foreign and domestic earnings), any import tariff is prohibitive, in the sense that the factor flows it induces will eliminate international commodity exchange.3 Unless both commodity and factor taxation are possible, it appears a country has little influence over the composition of its trade or domestic production. When factors are immobile, the optimal policy to achieve some desired production level other than the free trade level is to use the appropriate production tax-subsidy scheme. With factor mobility, however, this runs into the same problems as the tariff and would eventually force the country to specialize in the protected industry. But tariffs (or price restrictions) represent but one major form of commercial policy. Previous analysis has neglected the other-quantitative restrictions. The object of this note then is two-fold. First to demonstrate that quantitative restrictions on commodity trade will permit a country to influence its trade and production patterns, despite factor mobility, and without requiring distortions in both factor and commodity markets. Second, while doing this, to demonstrate the basic differences in the adjustment processes under these two commercial policy regimes. Although, in a static framework they are essentially equivalent, once factor mobility is introduced the distinction between a price and a quantity restriction becomes important. This last result is quite general and readily extends beyond the confines of the structure examined here. I begin by briefly considering the effects of an import tariff on trade and production in this system, and then go on to compare this with the effects of an import quota. Suppose the world is composed of two countries (home and foreign), each of which produces two goods (the home exportable Xe and the home importable Xm), through the services of two factors of production (labor and capital). Assuming identical linear homogeneous technologies in each country, let the factor endowments be such that the initial free trade equilibrium implies factor price equalization. Thus, although capital is assumed internationally mobile, there exists no incentive in the form of a return differential for it to move. There are two aspects of this equilibrium which are important for future results: First, the allocation of capital between the two countries which would give this equilibrium is not unique.4 Second, within a certain range,5 shifting capital from * Assistant professor of economics, Virginia Polytechnic Institute and State University. I am indebted to Rudiger Dornbusch, Michael Mussa, and a referee for comments and sii(Testionsn 1 See Mundell and, for example, Frank Flatters, Douglas Purvis, and Melvyn Krauss. Certain ambiguities can arise if both factors are internationally mobile, however. First, determining what it is that defines a country (usually its endowment), and second, if tastes are different in the two countries, determining who it is that holds these tastes. 2 See Ernest Nadel. Particularly when the assumption of identical technologies is relaxed-see Ronald Jones and John Chipman. 3 A one-way commodity flow will still occur, however, if foreign earnings are repatriated. Alternatively, the import restriction could force specialization in production of the importable. 4There is a range of endowment allocations for which the same total world production, relative prices and factor returns could occur. See Robert Warne. 5 Depending on how close each is to specialization initially. Again see Warne.