Tariffs vs Quotas in a Model of Trade with Capital Accumulation

This paper examines the equivalence among price-modifying and quantity-fixing international trade policies in a differential game. We employ two well-known capital accumulation dynamics for firms, due to Nerlove and Arrow and to Ramsey, respectively. We show that, in both cases, open-loop and closed-loop Nash equilibria coincide. Under the former accumulation the tariff-quota equivalence holds, while, in general, it does not under the latter. Moreover, in the Ramsey model, the country setting the trade policy (weakly) prefers a quantity-equivalent import quota to the adoption of the tariff. These results are not a consequence of the equilibrium concept we adopt (with and without market power), but directly follow from the interplay between market power and the properties of accumulation dynamics. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.