Tradeable Import Certificates: A Promising Instrument to Support Domestic Production in Strategic Sectors?

TL;DR

This paper explores tradeable import certificates (TIC) as a flexible policy tool to enhance domestic production in strategic sectors, analyzing their benefits and potential drawbacks through a simple two-country model.

Contribution

It revisits Warren Buffett's TIC proposal, analyzing its effectiveness and limitations in strategic sectors using a theoretical two-country model.

Findings

TIC can be an efficient and transparent trade policy instrument.

They reduce incentives for trade deviations in competitive markets.

Market power in domestic producers can cause adverse effects.

Abstract

Recent crises have increased concerns about supply security in sectors that are considered strategically important. The goal of sufficient domestic production capacities has motivated various forms of subsidies, tariffs and other instruments. This paper revisits Warren Buffett's (2003) proposal of tradeable import certificates (TIC) in this context. TIC differ from classical import quotas mainly by linking the import volume to export performance. The certificate price functions like a mix of flexible tariffs and export subsidies whose levels depend on net imports in the strategic sector. We analyse benefits and drawbacks in a simple two-country model. In competitive markets, TIC constitute a transparent and efficient instrument that effectively reduces incentives for other countries to deviate from agreements via hidden subsidies or non-tariff trade barriers. However, TIC can have adverse effects if there are domestic producers with market power in the certificate market.