How Barriers to International Trade Affect TFP

We ask how barriers to international trade affect TFP when there are monopoly rights in the import-competing industries. Holmes and Schmitz (1995) show that without barriers to trade TFP in these industries is as large as possible. We study the general case of finite barriers to trade. We find that binding quotas lead to the use of inefficient technology in the import-competing industries. In addition, infinite quotas or tariffs imply that the import-competing industries produce larger than efficient quantities, if they produce at all. For both of these reasons, barriers to international trade reduce TFP.