Import Quotas

Import Quota Definition

Import quotas are defined as follows:

Oftentimes, developing countries will impose protectionist measures such as quotas and tariffs to protect their fledgling industries from cheaper foreign alternatives to help reduce income losses to foreign countries and keep prices higher for domestic producers.

The point of an import quota is to limit how much of a foreign product can be imported into a country. The quota works by only allowing those with permission either through licensing or government agreement to bring in the quantity specified by the agreement. Once the quantity specified by the quota is reached, no more of the goods can be imported for that period.

Import Quota vs Tariff

What is the difference between an import quota vs a tariff? Well, an import quota is a limit on the quantity or the total values of the goods that can be imported into a country while a tariff is a tax that is placed on imported goods. While a quota limits the number of goods coming into a country, a tariff does not. A tariff serves to discourage imports by making them more expensive and, at the same time, provides a source of revenue to the government.

With an import quota in place, the domestic importers who are able to import under the quota can earn quota rents. Quota rent is the additional revenue earned by those who are allowed to import goods. The amount of the rent is the difference between the world market price at which the importer bought the goods and the domestic price at which the importer sells the goods. The quota rent can sometimes also go to the foreign producers who are able to export under the quota to the domestic market when the import licenses are given to foreign producers.

While quotas and tariffs are two different protectionist measures, they are both means to the same end: reducing imports. An import quota, however, is more effective since it is more restrictive than a tariff. With a tariff, there is no upper limit on how much of a good can be imported, it just means the good will be more expensive to import. A quota will set a limit on how much of a good can come into a country, making it more effective in restricting international trade.

Fig. 1 - An import quota regime

Figure 1 above shows the impact of an import quota on the price and quantity demanded of a good. The import quota is the quantity (Q₃ - Q₂). The domestic supply curve shifts to the right by this quota allowance. The new equilibrium price is at P_Q. Under free trade, the price would be at P_W, and the equilibrium quantity demanded is Q₄. Of this, the domestic producers only supply a quantity of Q_1, and the quantity of (Q₄ - Q₁) is made up of imports.

Under the import quota, the domestic supply increases from Q₁ to Q₂, and the demand decreases from Q₄ to Q₃. The rectangle represents the quota rent that goes to the importers who are allowed to import under the quota. This is the price difference (P_Q - P_W) multiplied by the imported quantity.

Fig. 2 - An import tariff regime

Figure 2 shows the impact of a tariff. As can be seen, the tariff causes the price to increase from P_W to P_T which causes a decrease in both the quantity demanded and supplied. Under free trade, the price would be at P_W, and the equilibrium quantity demanded is at Q_D. Of this, the domestic producers supply a quantity of Q_S. A benefit of a tariff is that it generates tax revenue for the government. This is one reason that a tariff may be preferable to a quota.

Types of Import Quotas

Import quotas in international trade can have several uses and effects. These effects also depend on the type of import quota. There are two main types of import quotas which can be broken down into more specific types:

• Absolute Quotas
• Tariff-rate Quotas

Absolute Quotas

An absolute quota is a quota that sets the amount of the specified goods that can be imported in a specified time period. Once the quota is reached, imports are capped. Absolute quotas can be applied universally so that imports can come from any country and count towards the quota limit. An import quota can also be set on a specific country, meaning that the domestic country will only accept a limited quantity or total value of the specified goods from the specified foreign country but may accept more of the goods from a different nation.

Tariff-Rate Import Quotas

A tariff-rate quota incorporates the concept of a tariff into a quota. Goods may be imported at a reduced tariff rate until a specified quota amount is reached. Any goods imported after that are subject to a higher tariff rate.

What is the Purpose of Import Quotas?

There are several objectives behind import quotas. Let's take a look at why governments may choose to use import quotas as a tool for controlling international trade.

1. First and foremost, the main objective of an import quota is to protect domestic industries from cheaper foreign goods.
2. Import quotas can serve to stabilize domestic prices by reducing foreign imports.
3. They help reduce the trade deficit by adjusting the negative balance of payments by increasing exports and reducing imports.
4. Import quotas can be set to encourage the use of scarce foreign exchange resources on more necessary items rather than "waste" them on unnecessary or luxury goods.
5. Governments may choose to set an import quota on luxury goods to discourage the consumption of these goods.
6. Governments can use import quotas as a form of retaliation against foreign governments as a response to trade or other policies.
7. Import quotas can be used to improve a country's international bargaining power.

Import Quotas Examples

To better understand import quotas, let's take a look at some import quota examples.

In the first example, the government has set an absolute quota on the amount of salmon that can be imported.

In this next example, we will look at an absolute quota where the government awards a license to specific importers, making them the only ones who can import a specific good.

In this last example, the government has set a tariff-rate quota on the number of computers that can be imported.

Advantages of Import Quotas

Import quotas are a tool that governments use to regulate and, in some cases, protect their domestic industries. They can serve various purposes, from safeguarding local jobs to managing trade deficits. Here, we will examine the advantages of import quotas and the circumstances under which they can prove beneficial.

Protection of Domestic Industries

One of the primary advantages of import quotas is the protection they offer to domestic industries. By limiting the amount of imported goods, quotas provide a buffer for local industries, allowing them to grow and compete. For instance, Japan has implemented quotas on rice imports to protect its local farming industry from competition with cheaper international alternatives.

Preservation of Jobs

Linked closely to the protection of domestic industries is the preservation of jobs. By reducing competition from foreign imports, quotas can help sustain employment in certain sectors. The U.S. sugar import quota is an example where jobs in the domestic sugar industry are preserved by limiting foreign competition.

Encouragement of Domestic Production

Import quotas can incentivize domestic production. When imports are limited, local businesses have a better chance to sell their goods, which can spur domestic manufacturing or agriculture. This was the goal of the Chinese government's quotas on corn, wheat, and rice.

Balance of Trade

Quotas can be used to manage a country's balance of trade, particularly if it has a significant trade deficit. By limiting imports, a country can prevent its foreign currency reserves from depleting too quickly. For example, India uses import quotas on a range of items to manage its trade balance.

In summary, import quotas can serve as a powerful tool for countries looking to protect and nurture their domestic industries, maintain employment levels, encourage local production, and manage their trade balance. However, they must be used judiciously, as they can also lead to trade disputes and potential retaliation from other countries.

Disadvantages of Import Quotas

While import quotas serve a distinct purpose in a nation's trade policy, there are also notable drawbacks to their implementation. The negative impacts of import quotas often manifest in forms such as revenue losses for the government, increased costs for consumers, potential inefficiencies in the economy, and potential for unequal treatment of importers, which could foster corruption. Below, we'll delve deeper into these points, shedding light on the challenges associated with import quotas.

Absence of Government Revenue

Unlike tariffs, which generate revenue for the government, import quotas don't offer such fiscal advantages. The price difference brought about by quotas—also known as quota rents—instead accrues to domestic importers or foreign producers, resulting in lost revenue opportunities for the government.

Increased Consumer Cost

One of the most tangible downsides of import quotas is the financial burden imposed on consumers. By limiting the influx of foreign goods, quotas can drive up prices, compelling consumers to pay more for the same products. A stark example can be seen in the U.S., where sugar import quotas have led to higher prices for consumers compared to the global market.

Net Efficiency Loss

The concept of net efficiency loss, or deadweight loss, highlights the broader economic implications of import quotas. Even though they may protect certain domestic industries, the overall costs to the economy, primarily in the form of higher prices, often outweigh the benefits, leading to a net efficiency loss. This phenomenon reflects the complex, often hidden, economic repercussions of trade protectionism.

Unequal Treatment of Importers

Import quotas can also foster inequality among importers. Depending on how quota licenses are distributed, some importers might receive more favourable terms than others. This discrepancy can encourage corruption, as those responsible for assigning licenses become susceptible to bribery, undermining fairness in the trade process.

Hindered Economic Progress

Over the long term, import quotas can stifle economic progress by protecting inefficient domestic industries from competition. This lack of competition can lead to complacency, stifling innovation, and progress in the protected industries.

In closing, while import quotas may offer certain protective benefits, their potential pitfalls warrant careful consideration. The implications of these policies stretch beyond immediate market dynamics, affecting consumers, government revenues, and overall economic efficiency. Consequently, the decision to implement import quotas should be taken with a comprehensive understanding of these trade-offs, in line with the broader economic goals of the nation.