The Costs of Restrictive Trade Policies in the Presence of Factor Tax Distortions

Abstract This paper uses a numerical general equilibrium model to examine the quantitative importance of pre-existing factor tax distortions for the welfare effects of tariffs and import quotas. The presence of preexisting taxes can greatly raise the costs of these policies, possibly by over several hundred percent. For a tariff much of this extra cost can be offset if tariff revenues are used to reduce distortionary taxes. Hence there can…