INTERNATIONAL ECONOMIC REVIEW Vol. 44, No. 3, August 2003 TRADE RESTRICTIVENESS AND EFFICIENCY * BY NANCY H. CHAU,ROLF F¨ ARE, AND SHAWNA GROSSKOPF 1 Department of Applied Economics and Management, Cornell University, NY; Department of Economics, Oregon State University; Department of Economics, Oregon State University This article proposes a trade restrictiveness quantity index (TRQI) to mea- sure the welfare impact of trade restrictions based on a distance functions ap- proach. The TRQI embodies two Farrell measures of efficiency—respectively for producers and consumers—that can be computed using standard efficiency measurement techniques. The TRQI can also be decomposed into a trade dis- tortion and domestic distortion component. In the context of the debate on the interlinkages between openness and economic performance, the TRQI offers a means to disentangle economic inefficiencies induced by trade restrictions alone, from otherwise not directly trade-related economic inefficiencies induced by do- mestic distortions. 1. INTRODUCTION In a sequence of papers, Anderson and Neary used distance functions to con- struct indexes of trade restrictiveness (henceforth, TRI). 2 This index can be thought of as a distance function defined in price space, and yields a summary measure of the height of trade barriers in an economy. In this article, we provide a complementary index based on distance functions in quantity space, which yields a general equilibrium measure of the impact of trade restrictions on welfare. The origin of our approach can be traced back to the Mahler inequality, Debreu (1951), Malmquist (1953), and Shephard (1953), which was made operational and pop- ularized by Farrell (1957), Charnes et al. (1978), and F¨ are et al. (1978), among others, 3 where distance functions are defined in commodity space and estimated using activity analysis or econometric techniques. Borrowing the insights of these ∗ Manuscript received March 1998; revised August 2002. 1 We are grateful to James Anderson, Arnab Basu, Jean-Christophe Bureau, Peter Neary, Luca Salvatici, Henry Wan, and two anonymous referees for valuable suggestions and comments. We also thank seminar participants at the Southern Economics Association Annual meeting in Baltimore, Chinese University of Hong Kong, College of William and Mary, Cornell University, IFAU in Uppsala (Sweden), Federal Reserve Bank of Dallas, and the International Agricultural Trade Consortium in New Orleans. Please address correspondence to: Nancy H. Chau, Department of Applied Eco- nomics and Management, Cornell University, 212 Warren Hall, Ithaca, NY 14853 USA. E-mail: hyc3@cornell.edu. 2 See for instance, Anderson (1995), Anderson and Neary (1992, 1996, 2003) and Anderson et al. (1995). 3 These influential papers have inspired a voluminous efficiency measurement literature encom- passing both sector-specific and economy-wide studies. See, for instance, F¨ are and Grosskopf (1995) for a survey. 1079