There are two basic ways to provide protection to domestic import-competing industries; a tariff or a quota. The choice between one or the other is likely to depend on several different concerns. One concern is the revenue effects. A tariff has an immediate advantage for governments in that it will automatically generate tariff revenue (assuming the tariff is not prohibitive). Quotas may or may not generate revenue depending on how the quota is administered. If a quota is administered by selling quota tickets (i.e., import rights)
then a quota will generate government revenue, however, if the quota is administered on a first-come, first- served basis, or if quota tickets are given away, then no revenue is collected. Administrative costs of tariffs and quotas are also likely to differ. Tariff collection involves product identification, collection and processing of fees. Quota administration will also involve product identification and some method of keeping track, or counting, the product as it enters the country in multiple ports of entry. It may also involve some method of auctioning or disbursing quota tickets. It is not obvious which of these two procedures would be less costly, although, if I had to guess, I would lean towards tariff collection. Perhaps the most important distinction between the two policies, however, is the protective effect the policy has on the import-competing industries. In one sense, quotas are more protective of the domestic industry because they limit the extent of import competition to a fixed maximum quantity. The quota provides an upper bound to the foreign competition the domestic industries will face. In contrast, tariffs simply raise the price, but do not limit the degree of competition or trade volume to any particular level. In the original GATT, a preference for the application of tariffs rather than quotas was introduced as a guiding principle. One reason was the sense that tariffs allowed for more market flexibility and thus could be expected to be less protective over time. Another reason concerned transparency. With a quota in place, it is very difficult to discern the degree to which a market is protected since it can be difficult to measure how far the quota is below the free trade import level. With a tariff in place, especially an ad valorem tariff, one can use the tariff percentage as a measure of the degree of protection.
A quota is another form of an import restriction that is a nontariff barrier to trade. The quota is set by a national government and is a maximum amount of some import as measured based on quantity or value. Determining who is allowed to import under the quota is usually done through direct allocation or sales of import licenses. The licenses can be held by individuals or firms, both foreign and domestic.
An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time. For example, a country might limit sugar imports to 50 tons per year. Quotas, like other trade restrictions, are used to benefit the producers of a good in a domestic economy at the expense of all consumers of the good in that economy. Critics say quotas often lead to corruption (bribes to get a quota allocation), smuggling (circumventing a quota), and higher prices for consumers. In economics, quotas are thought to be less economically efficient than tariffs which in turn are less economically efficient than free trade.
Why Country Implement Quotas
An import quota works by reducing the amount of foreign goods a country may import. In a competitive market, the equilibrium point which determines the price and quantity produced of a good is where the demand curve and the domestic supply curve intersect. In the case of a purely domestic market, this point is at P* and Q* (see the above Figure)...
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