Strategic Trade Policy and Direct Foreign Investment: Tariffs Versus Quotas

Abstract

This paper investigates the equivalence of tariffs and quotas when the market in question is imperfectly competitive and open to direct foreign investment. The absence of a foreign supply response under a quota, so critical to the analysis of the differential impact of tariffs and quotas under imperfect competition, is called into question by the potential occurrence of direct foreign investment. The paper proves the equivalence of optimal tariffs and quotas when the markets are oligopolistic and open to direct foreign investment.