Economics
Tariffs and Quotas
Tariffs and quotas are trade barriers used by governments to restrict imports and protect domestic industries. Tariffs are taxes imposed on imported goods, making them more expensive for consumers, while quotas set limits on the quantity of goods that can be imported. Both measures aim to reduce competition from foreign producers and support local businesses.
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12 Key excerpts on "Tariffs and Quotas"
eBook - PDFInternational Trade and Agriculture
Theories and Practices
- Won W. Koo, P. Lynn Kennedy(Authors)
- 2008(Publication Date)
- Wiley-Blackwell(Publisher)
Quotas have been banned by the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO). The organizations have supported the principle that quantitative restrictions, such as quotas, should be converted into tariffs. This has been encouraged because import and export quotas are more trade distorting than tariffs. Since quotas are more effective than tariffs in insulating the domestic market from the world market, they result in inefficient use of resources in production, and inefficient consumption of goods in the protected industry. Given this, it is important to provide a description of quota systems and their welfare and economic effects. To accomplish this, an overview of import and ex- port quotas, and their impacts on trade and the domestic market, is provided. Special emphasis is placed on the comparison of import quotas and import tariffs. A descrip- tion of the tariff rate quota (TRQ), a tool used under various trade agreements to increase market access, is also presented. IMPORT QUOTAS Import quotas are quantitative trade restrictions used primarily to protect domestic producers and/or to alter the balance of payments. For example, to protect domestic sugar beet and cane growers, the US government limits sugar imports to approxim- ately 1.25 million tons annually. For an import quota to be effective, the limit must be below what would be imported under free market conditions. Two major types of import quotas used throughout the world are unilateral quotas and bilateral (or multilateral) quotas. All of these impose absolute limits in value or quantity of imports of a commodity during a given period of time. The unilateral quota is a fixed amount of imports that the importing country deter- mines without prior consultation or negotiation with other countries. Hence, this type of quota often faces complaints and retaliation from trading partners.
eBook - ePub- Robert Howse, Antonia Eliason(Authors)
- 2013(Publication Date)
- Routledge(Publisher)
For example, governments in importing countries may seek to protect domestic industries by imposing quantitative restrictions (discussed later in this chapter). One means by which a government may impose a quantitative restriction is by creating a quota system. The ‘tariff–quota equivalence’ result indicates that the effects of Tariffs and Quotas on prices in perfectly competitive markets are equivalent. Furthermore, as protectionist devices, quotas have the virtue of definitively limiting the volume of imports and thus they provide a stronger assurance of protection to domestic producers. However, quotas also have the vice, depending on their design, of insulating domestic producers from most forms of foreign competition and thus they may encourage inefficient domestic production. Non-prohibitive tariffs may be surmountable by highly efficient or competitive producers. Under this type of instrument, there may still be some incentive for domestic producers to enhance their productive efficiency. Additionally, when there is only one producer of a product in a domestic market, a non-prohibitive tariff is more effective than a quota at inhibiting this producer’s ability to exercise monopoly power. 6 Another difference between Tariffs and Quotas relates to who collects the scarcity rents that they engender. Governments in importing countries collect revenues from nonprohibitive tariffs, while, depending on how they are allocated, domestic holders of import quotas or licences may collect scarcity rents. If quotas are allocated to foreign exporters, these firms may collect scarcity rents by charging more for their goods in the protected market, without being under any obligation to pay customs duties on the imports. Tariffs should also be distinguished from production subsidies designed to make domestic items artificially competitive with imports
eBook - PDF- Dominick Salvatore(Author)
- 2020(Publication Date)
- Wiley(Publisher)
In Section 9.4, the various arguments for protection are presented, from the clearly fallacious ones to those that seem to make some economic sense. Section 9.5 examines strategic trade and industrial policies. Section 9.6 briefly sur-veys the history of U.S. commercial or trade policy from 1934 to the present. Finally, Sec-tion 9.7 summarizes the outcome of the Uruguay Round of trade negotiations, discusses the launching of the Doha Round, and identifies the outstanding trade problems facing the world today. The appendix analyzes graphically the operation of centralized cartels, inter-national price discrimination, and the use of taxes and subsidies instead of tariffs to correct domestic distortions. 9.2 Import Quotas A quota is the most important nontariff trade barrier. It is a direct quantitative restric-tion on the amount of a commodity allowed to be imported or exported. In this section, we examine import quotas. Export quotas (in the form of voluntary export restraints) are examined in Section 9.3A. An import quota is examined in this section with the same type of partial equilibrium analysis used in Section 8.2 to analyze the effects of an import tariff. The similarities between an import quota and an equivalent import tariff are also noted. 9.2 Import Quotas 227 9.2A Effects of an Import Quota Import quotas can be used to protect a domestic industry, to protect domestic agriculture, and/or for balance-of-payments reasons. Import quotas were very common in Western Europe immediately after World War II. Since then, import quotas have been used by prac-tically all industrial nations to protect their agriculture and by developing nations to stimu-late import substitution of manufactured products and for balance-of-payments reasons. The partial equilibrium effects of an import quota can be illustrated with Figure 9.1, which is almost identical to Figure 8.1. In Figure 9.1, D X is the demand curve and S X is the supply curve of commodity X for the nation.
eBook - PDF- Dominick Salvatore(Author)
- 2019(Publication Date)
- Wiley(Publisher)
In Section 9.4, the various arguments for protection are presented, from the clearly fallacious ones to those that seem to make some economic sense. Section 9.5 examines strategic trade and industrial policies. Section 9.6 briefly sur- veys the history of U.S. commercial or trade policy from 1934 to the present. Finally, Sec- tion 9.7 summarizes the outcome of the Uruguay Round of trade negotiations, discusses the launching of the Doha Round, and identifies the outstanding trade problems facing the world today. The appendix analyzes graphically the operation of centralized cartels, inter- national price discrimination, and the use of taxes and subsidies instead of tariffs to correct domestic distortions. 9.2 Import Quotas A quota is the most important nontariff trade barrier. It is a direct quantitative restric- tion on the amount of a commodity allowed to be imported or exported. In this section, we examine import quotas. Export quotas (in the form of voluntary export restraints) are examined in Section 9.3A. An import quota is examined in this section with the same type of partial equilibrium analysis used in Section 8.2 to analyze the effects of an import tariff. The similarities between an import quota and an equivalent import tariff are also noted. 9.2 Import Quotas 227 9.2A Effects of an Import Quota Import quotas can be used to protect a domestic industry, to protect domestic agriculture, and/or for balance-of-payments reasons. Import quotas were very common in Western Europe immediately after World War II. Since then, import quotas have been used by prac- tically all industrial nations to protect their agriculture and by developing nations to stimu- late import substitution of manufactured products and for balance-of-payments reasons. The partial equilibrium effects of an import quota can be illustrated with Figure 9.1, which is almost identical to Figure 8.1. In Figure 9.1, D X is the demand curve and S X is the supply curve of commodity X for the nation.
eBook - ePub- Kyle Bagwell, Robert W. Staiger(Authors)
- 2016(Publication Date)
- North Holland(Publisher)
The main requirement is an assumption on counterfactual import growth for products from trading partners subject to an imposed TTB during the period that the TTB was in effect. The current data relies on the relatively conservative assumption that TTB-impacted products would have grown at the average rate of import growth for non-TTB impacted products. be While Latvia had a larger share of its exports subject to G20-imposed TTBs than China in 2013, because it is such a small exporting country, when measured in dollar terms it was not in the top 20 most affected exporters. bf More generally, the empirical relevance of the distinction between Tariffs and Quotas depends on the production technology in an industry and its market structure. Since Bhagwati (1965), economists have understood the general equivalence of Tariffs and Quotas in perfectly competitive markets with a competitive allocation of quota rights. Interestingly, since its inception in 1947, the GATT/WTO system has pushed for members to adopt tariffs rather than quotas. Important theoretical differences between Tariffs and Quotas have focused on deviations from the assumption of perfect competition (Panagariya, 1981, 1982) or wasteful resources devoted to gaining import licenses (Krueger, 1974). bg In particular, a quota might allocate a value-based measure of domestic market share to all foreign producers—eg, 50%—and then further divide the aggregate quota to historical exporters based on historical market shares. This system has the advantage of dramatically reducing competitive pressure on domestic producers, partially placating major foreign producers, while facing minimal resistance from the major losers, ie, disorganized consumers and potential new entrants from foreign countries
eBook - PDFThe Reciprocal Trade Policy of the United States
A Study in Trade Philosophy
- Henry J. Tasca(Author)
- 2016(Publication Date)
16 But the strangling effects of these measures upon international trade, to say nothing of the administrative difficulties involved, may compel these minority interests to yield. Compared with tariffs, quotas provide an eco-nomic protectionism considerably less subtle in its restrictive effect upon economic development. Q U O T A PROVISIONS IN T H E T R A D E A G R E E M E N T S A basic purpose of the trade policy of the United States is the mitigation and removal of trade barriers in order to promote a restoration of world commerce. Quantitative restrictions, ac-cordingly, must be the object of a frontal attack of one form or another. T o what extent have the trade agreements progressed in this direction? T h e use of quotas and allied measures of direct quantitative restrictions upon foreign trade has been confined chiefly to system. Sec League of Nations, Remarks on the Present Phase of International Economic Relations, II. Economic and Financial 1933. II. B. i i , p. 2 9 — f o o t -note 2. 15 In addition to the previous citations the following may be added. League of Nations, Re-ports Approved by the Conference on July 27, 1933 and Resolu-tions Adopted by the Bureau and the Executive Committee, Monetary and Eco-nomic Conference, II. Economic and Financial 1933. II. Spec. 4, London, 1933, p. 22; U. S. Department of State, Report of the Delegates of the United States of America to the Seventh International Conference of American States, Con-ference Series, No. 19, Washington, 1934, p. 261 (resolution L X V I I ) ; U. S. T a r i f f Commission, The Tariff and its History, Washington, 1934, p. 63. League of Nations, Equality of Treatment in the Present State of International Commercial Relations; the Most-Favored-Nation Clause. II. Economic and Financial 1936. II. B. 9, p. 25. 10 Sec statement by F.
eBook - PDF- John McLaren(Author)
- 2012(Publication Date)
- Wiley(Publisher)
This principle is called the equivalence of Tariffs and Quotas. It is a general principle in models of this type, but it should be pointed out that it breaks down under a number of important circumstances. 1. Uncertainty. If, after the government sets the level of the tariff or quota, unpredictable random shocks shift the demand and supply curves, the equilibrium will be affected in different ways in the case of a tariff compared to a quota. For example, under a tariff, the quantity imported will generally change as supply and demand curves shift, but under a quota it will be unchanged (and domestic prices will generally be more volatile under a quota as a result). 2. Rent Seeking. Under a quota, ownership of an import license is valuable because it allows the bearer to buy the good at an artificially low world 126 WHY DOESN’T OUR GOVERNMENT WANT US TO IMPORT SUGAR? price and sell it at the artificially high domestic price. As a result, if a firm can increase its allocation of these licenses by undertaking some action, even if that action is costly, it may be a worthwhile investment to do so. This is called rent seeking; more generally, rent seeking denotes any use of otherwise potentially productive resources to increase one’s share of an economic rent such as a quota rent. The phrase was coined in a famous analysis by Krueger (1974), who argued that such competition for quota rents was an argument for preferring tariffs over quotas. For example, a firm might hire a team of lobbyists, professionals who spe- cialize in persuading government decision-makers, to go to the trade ministry and convince the bureaucrats there that the firm deserves a larger share of the quota licenses than other firms. If all firms do this, and there is free entry into rent seeking, then zero profits will result, meaning that the quota rent each firm receives will be equal to that firm’s spending on lobbyists.
eBook - PDFAdvanced International Trade
Theory and Evidence - Second Edition
- Robert C. Feenstra(Author)
- 2015(Publication Date)
- Princeton University Press(Publisher)
8 Import Tariffs and Dumping T here are various reasons why countries use import tariffs and other types of trade policies. Nearly all countries have used these instruments in the early stages of their development to foster the growth of domestic industries, in what is called import substitution . Such policies have been heavily criticized for protect-ing inefficient domestic industries from international competition. Many coun-tries have later switched to an export promotion regime, under which industries are expected to meet international competition through exports, albeit with subsi-dies (hopefully temporary) given to exporters. The more than 140 members of the WTO have all committed to abandon such heavily regulated trade regimes, and move toward substantially freer trade. One question, then, is whether the use of import tariffs and other trade policies at early stages of the development process has any rationale at all, especially when other markets (such as for capital) might not be functioning well. While this is too big a question to deal with adequately in this chapter, we will briefly discuss the rationale for temporary tariffs in what is called “infant industry” protection. A second question concerns the welfare cost of Tariffs and Quotas in situations where other markets are working well. Even under the GATT/WTO, countries are permitted to apply tariffs in a number of cases, including: (i) “escape clause” tar-iffs, under which countries temporarily escape from their promise to keep tariffs low, due to injury in an import-competing industry; (ii) antidumping duties, under which tariffs are applied to offset import prices that are “too low.” For theoretical purposes, we can think of escape clause tariffs as exogenously imposed on export-ing firms, and this will be our assumption in the first part of the chapter. We will examine the response of the exporters, as well as the response of import-competing firms, to such tariffs.
eBook - PDFThe Theory of International Trade
An Alternative Approach
- B. Horvat(Author)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
Reduced import – production plus con- sumption effects – improves balance of trade, saves foreign exchange and contributes to economic independence. Tariffs may also be used to increase military preparedness or as a bargaining instrument. If a large country imposes tariffs, it will change international prices and thus change terms of trade. Countries whose competitiveness is deteriorating move towards increased protectionism (as Great Britain did after the First World War). Tariff represents an import tax whereby the lower international price of importables is equalized with the domestic price p m (1 t)P m Similarly an export tax reduces domestic price of exportables p e (1 t) P e where m stands for importables and e for exportables. Already Abba Lerner (1934) noticed that a general export tax has the same effect as a general import tax, ceteris paribus. The ratio of domestic prices remains the same p e 1 P e , p m P m (1 t) or p e (1 t) P e (18.1) p m 1 t P m (the conclusion is not valid when non-traded goods are included). The imposition of export tax reduces domestic export prices but leaves intact import prices. That may also be interpreted as un- changed domestic export prices and increased import prices. In the short run an export tax operates in a depressive way (for exportables) and tariff in an expansionary way (for import substitutes). The lat- ter seems preferable for policy purposes. Tariffs and Subsidies 127 18.2 PROHIBITIVE TARIFF AND SUBSIDY A tariff that stops imports is called prohibitive. Imports will be stopped when the ratio of home prices is equalized with the ratio of world prices with tariffs p 1 / p 2 (1 t)P 1 / P 2 (18.2) Tariff rate t is prohibitive. Lower than that is insufficient because X 1 will continue to be imported. A higher rate is not necessary. That would mean pure revenue collecting for the government and there are more efficient instruments for that purpose (for instance, value added tax).
eBook - ePub- Noritsugu Nakanishi(Author)
- 2018(Publication Date)
- WSPC(Publisher)
directly control trade flow. In the competitive circumstance, the effects of quantitative restrictions are basically identical to those of price intervention policies. In this subsection, we show the similarities and differences between quantitative restrictions and price intervention policies.Import quota: By imposing an upper bound of the amount of imports, import quota restricts the inflow of goods. The imported good in the domestic market will be in short supply and, therefore, the domestic price of the imported good tends to rise. On the other hand, because the effective import demand from the importing country in the world market decreases, the world price tends to fall. Consequently, as in the case of tariffs, there arises a gap between the domestic and world prices of the good, which yields quota rent.In the case of tariffs, the amount of money corresponding to the gap between the domestic and world prices accrues to the government as tariff revenue. In contrast, in the case of import quota, who receive the quota rent depends upon the way how the import licenses are allocated to potential importers. If the licenses are rationed (based on, for example, the past records of imports by the applicants) without any payment, the licensed importers will receive the quota rent. If, on the other hand, the licenses are auctioned off competitively to many potential importers, the “price” of a license to import one unit of the good would rise up to the (expected) gap between the domestic and world prices. Consequently, the quota rent eventually accrues to the government as the sales of the import licenses. To avoid an analytical complexity, we assume here that the licenses are allocated among domestic importers through a competitive auction and that the sales of the import licenses will be transferred to the domestic household in a lump-sum fashion.
eBook - PDFThe Law and Policy of the World Trade Organization
Text, Cases and Materials
- Peter Van den Bossche, Werner Zdouc(Authors)
- 2017(Publication Date)
- Cambridge University Press(Publisher)
only applicable when certain defined conditions are not fulfilled; (2) an import or export quota, i.e. a measure, as the examples given above, indicating the quantity that may be imported or exported; a quota can be a global quota, a global quota allocated among countries or a bilateral quota; (3) import or export licensing, as further discussed below; 6 and (4) other quanti- tative restrictions. 7 For an illustrative list of quantitative restrictions, refer to the 2012 WTO Decision on Notification Procedures for Quantitative Restrictions, also referred to as the ‘QR Decision’. 8 Confusingly perhaps, a tariff (rate) quota, or ‘TRQ’, is not a quota in the strict sense of the term; it is not a quantitative restriction. 9 A tariff quota is a quantity, which can be imported at a certain duty. The panel in US – Line Pipe (2002) stated that a tariff quota involves the ‘application of a higher tariff rate to imported goods after a specific quantity of the item has entered the country at a lower prevailing rate’. 10 Any quantity above the quota is subject to a higher duty. 11 481 Quantitative Restrictions on Trade in Goods 12 The frequent use of tariff quotas with regard to agricultural products is a result of the ‘tariffication’ exercise under which quantitative restrictions on trade in agricultural products were ‘translated’ into tariffs and in particular ‘tariff quotas’. See below, p. 490. 13 Appellate Body Reports, EC– Bananas III (Article 21.5 – Ecuador II) / EC – Bananas III (Article 21.5 – US) (2008), para. 335. 14 See Council for Trade in Goods, Decision on Notification Procedures for Quantitative Restrictions, G/L/59/ Rev.1, dated 3 July 2012, para. 1. 15 See ibid., para. 2. For an example of such notification, see a notification by Australia, G/MA/QR/N/AUS/2, dated 6 February 2015. 16 See www.wto.org/english/res_e/statis_e/statis_e.htm.
eBook - PDFThe Law and Policy of the World Trade Organization
Text, Cases, and Materials
- Peter Van den Bossche, Werner Zdouc(Authors)
- 2021(Publication Date)
- Cambridge University Press(Publisher)
67 However, by introducing a system of tariff quotas, it was possible to guarantee: (1) that the quantities imported before Article 4.2 of the Agreement on Agriculture took effect could continue to be imported; and (2) that some new quantities were subject to tariffs that were not prohibitive. Under this system of tariff quotas, lower tariffs applied to specified quantities (in-quota quan- tities), while higher (often prohibitive) tariffs applied to quantities that exceed the quota (over-quota quantities). 68 At the Bali Ministerial Conference in December 2013, the WTO adopted an understanding on the administration of tariff quotas for agricultural products. 69 This Understanding stipulates that tariff quota administration shall be deemed to be an instance of import licensing to which the provisions of the Agreement 534 7 Non-Tariff Barriers 70 See ibid., para. 1. 71 See ibid., paras. 6–15 and Annex A. 72 See Panel Report, Korea – Various Measures on Beef (2001), para. 7.62. 73 See Appellate Body Report, Indonesia – Import Licensing Regimes (2017), para. 5.76. 74 See ibid., para. 5.79. 75 See ibid., para. 5.80. on Import Licensing Procedures apply in full, subject to the Agreement on Agriculture and the more specific and additional obligations set out in the Understanding. 70 The Understanding addresses in particular the problem of under-filling the tariff quota. 71 With respect to the relationship between Article 4.2 of the Agreement on Agriculture and Article XI of the GATT 1994, the panel in Korea – Various Measures on Beef (2001) stated that: [W]hen dealing with measures relating to agricultural products which should have been converted into tariffs or tariff-quotas, a violation of Article XI of GATT … would necessar- ily constitute a violation of Article 4.2 of the Agreement on Agriculture and its footnote.
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