Knowledge Bank

Recent developments in international trade theory suggest that, where markets are imperfectly competitive, there may be a justification for protectionism. This has come to be widely known as strategic trade policy. There has, however, been little consideration of the applicability of these arguments to agricultural trade. Since trade in processed food products is the most dynamic sector of agricultural trade and given that these markets are typically characterised (to varying degrees) by imperfect competition, it may nevertheless be the case that these recent theoretical developments may have some relevance for the use of protectionism in processed food markets. This paper, therefore, considers the use of import restrictions as a means of increasing national welfare with the U.S. cheese processing sector chosen as a case-study. Using a computable partial equilibrium model, the results suggest that the U.S. government could increase national welfare by using import quotas to protect its cheese processing sector; however, compared with the quota regime currently in use, the optimal import restrictions are more liberal in terms of the level of imports permitted.