Estimation of Source- and Quality-Differentiated Import Demand Under Aggregate Import Quota: An Application to Japan's Wheat

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  • Since a seminal work by Armington (1969), estimating source-differentiated import demand has become a useful tool in applied international trade research. Trade policy evaluation and simulation require reliable estimates of the responsiveness of import demand to international price changes. Unfortunately, for certain commodities, reliable estimation of import demand is a particularly arduous task given the pervasive presence of quantitative restrictions in international trade. Import quotas, for example, have been implemented in many countries for a variety of products. In spite of its apparent importance to trade policy analysis, surprisingly little attention has been paid to investigate the impact of an import quota on the estimation of import demand. One exception is the work by Bertola and Faini (1991). They applied the theory of rationing of Neary and Roberts (1980) to investigate the impact of an import quota on the import demand for commodities under quota and non-quota regimes. Similar to the work on demand and production theory under rationing, their results allow one to predict non-rationed import behavior from observations on a market under import rationing. Such results are particularly useful for investigating the effect of complete trade liberalization. To further research on this important, but neglected topic, we consider a different case where an aggregate import quota is applied to a seemingly homogenous product differentiated by country of origin. The objective of the present study is to provide a theoretical and empirical methodology for the estimation of source-differentiated import demand under import quota. The model is developed specifically in the context of the Japanese wheat import bu applicable generally. The wheat import demand differentiated by class and country of origin is derived from a restricted profit function for the Japanese grain importers. Wheat is chosen because many importing countries rely on quota licenses for all wheat imports (USDA 1997). Japan is selected because Japan is one of the most important international wheat markets. As a result of Japan's conversion of import quotas to tariff-rate quotas, and agreement to reduce its state-trading markup on wheat in 1995, wheat exporters' access to the Japanese market is expected to increase. It is therefore of interest for policymakers and exporters to know the potential effect of this increased market access on the Japanese wheat import demand. The rest of the paper is organized as follows. Section II presents a brief review of previous estimation of the Japanese wheat importing process. Section III characterizes the importers' behavior under import quota in terms of the restricted profit function. Section IV discusses the specification of flexible functional form models and derives a system of import demand functions under import quota. Finally, empirical results are presented. Section VI is a summary with conclusions.

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    Attribution-NonCommercial-NoDerivatives 3.0 International