Barriers to trade exist in many forms. A tariff is a barrier to trade that taxes imports or exports, thus increasing the cost of a good. Another barrier to trade is an import quota, which places a limit on the amount of a good that may enter a country.
Types of Quotas
There are two main types of import quota: the absolute quota and the tariff-rate quota.
An absolute quota is a limit on the quantity of specific goods that may enter a country during a certain time period. Once the quota has been fulfilled, no other goods may be imported into the country. An absolute quota may be set globally, in which case goods may be imported from any country until the goal has been reached. An absolute quota may also be set selectively for certain countries. As an example, suppose an absolute, global quota for pens is set at 50 million. The government is setting a limit that, in total, only 50 million pens can be imported. If there were a selective, absolute quota, only 50 million pens would be able to be imported, but this total would be divided among exporting countries. Country A might only be able to export 10 million pens, Country B might be able to export 25 million pens, and Country C might be able to export 15 million pens. Collectively, the total imports equal 50 million pens, but the proportions of pens from each country are set.
A tariff-rate quota is a two-tier quota system that combines characteristics of tariffs and quotas. Under a tariff-rate quota system, an initial quota of a good is allowed to enter the country at a lower duty rate. Once the initial quota is surpassed, imports are not stopped; instead, more of the good may be imported, but at a higher tariff rate . For example, under a tariff-rate quota system, a country may allow 50 million pens to be imported at the low tariff rate of $1 each. Any pen that is imported after this first-tier quota has been reached would be charged a higher tariff, say $3 each.
Sugar: Tariff-Rate Barriers
In the US, the import of sugar is regulated by tariff-rate barriers. In 2012, the US allowed over 150,000 tons of raw cane sugar to be imported from Brazil at a reduced tariff rate.
Reasons to Implement Quotas
Quotas are often implemented for similar reasons as other trade barriers. Often, quotas are instituted to:
- Protect domestic industries and employment: By reducing the number of foreign imports, domestic suppliers must produce more to meet domestic demand. By producing more, the suppliers must hire more domestic workers, increasing employment. Additionally, setting quotas to reduce foreign competition allows domestic "infant industries," or young, small industries, to grow and mature to a competitive level.
- Protect against unfair trade practices: Setting a quota helps protect a domestic economy from unfair trade practices such as dumping, the pricing of imports below production cost. By restricting imports, quotas minimize the impact of such activities.
- Protect national security: Import quotas discourage imports and encourage domestic production of goods that may be necessary to the security of the country. By protecting and encouraging the growth of these defense-related industries, a country will not have to be dependent on foreign imports in the event of a war.
Consequences of Quotas
Like other trade barriers, quotas restrict international trade, and thus, have consequences for the domestic market. In particular, quotas restrict competition for domestic commodities, which raises prices and reduces selection. This hurts the domestic consumer, who experiences a loss in consumer surplus. On the other hand, this very action benefits the domestic producer, who sees an increase in producer surplus. Often, the increase in producer surplus is not enough to offset the loss in consumer surplus, so the economy experiences a loss in total surplus.
Quotas may also foster negative economic activities. Import quotas may promote administrative corruption, especially in countries where import quotas are given to selected importers. There are incentives to give the quotas to importers who can provide the most favors or the largest bribes to officials. Quotas may also encourage smuggling. As quotas raise the price of domestic goods, it becomes profitable to try and circumvent the quota by bringing in goods illegally, or in excess of the quota.