The principal intention of the distortions is normally to confer the rents on producers in the
distorting state, but there is leakage. For a variety of reasons, some of the rent accrues to
value chains that link producers in developing countries to developed country markets. So
long as the volume or price of the ‘preferential supply’ is insufficient to depress prices in the
importer to the level that would obtain under a liberal trade regime, there is a double gain for
elements in the supply chain of the ‘preferred exporter’: not only are goods sourced from
them rather than from less preferred suppliers, but also the final price is artificially inflated.
The existence of rents may alter the power relations within the value chain that supplies the
imported goods. If, for example, the dominant buyer needs particular suppliers in order to
acquire or perpetuate the rent, the latter’s power within the chain may be much greater than it
would be in a market that is regulated less or in a different way. This may influence the
distribution of the rent between actors in the chain.
Hence, the gain for any given group of preferred producers will depend on three conditions:
♦ condition 1: the extent to which demand for their goods is increased;
♦ condition 2: the extent to which final prices are inflated;
♦ condition 3: the architecture of the protection/preference institutional framework
and the characteristics of the market.
The first two conditions will determine the absolute scale of the rent. Any impact will be
most substantial for product markets that face protectionism so severe that it restricts sharply
the possibility of importing from non-preferred sources. It is in these cases that the price
difference between the internal price and the world price is likely to be greatest. In such
heavily protected sectors preferences typically take the form of special quotas allowing some
third parties to supply the high-priced market without paying the substantial import duties
that either exclude other imports or drastically reduce their profitability.
The effect is most easy to plot where there are special quotas. In such cases they are most
favourable for those third parties that receive preferences and would not be able to sell larger
volumes on the protected market even if it were unrestricted. The most adversely affected
third parties are competitive producers that do not receive preferences. In the middle are
countries that are preferred but are also competitive producers. In such cases, it is uncertain
without a detailed analysis whether they gain more on the ‘swings’ of high prices than they
lose on the ‘roundabouts’ of volume limitation.
The distribution of these gains and costs may be heavily influenced by condition 3: the
architecture of the regimes conferring both the underlying protection and the preferences.
Depending upon the power distribution within a value chain trade policy rents may:
♦ accrue to the producers in the preferred states, increasing the profitability of
production and allowing them to:
о increase supply relative to that of non-preferred states; or
о compensate for production, storage or transport inefficiency relative to that
of non-preferred states; or
о invest in the human and physical capital required for upgrading;
♦ accrue to the buyers, increasing the profitability of importing from preferred states
relative to non-preferred ones leading to: