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. In , the US allowed over , tons of raw cane sugar to be imported from Brazil at a reduced tariff rate.
Quotas are often implemented for similar reasons as other trade barriers. Often, quotas are instituted to:. 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.
Additionally, quotas are typically more complex and bureaucratic than tariffs. For example, there is not just one U. The U. Quotas can also be harder to reverse than tariffs. Although quotas cap the total level of sales from a given country, the foreign exporters who are allocated a portion of a quota benefit from higher prices and less competition. As a result, there may be less pressure from our trading partners to get rid of quotas once they have been put in place.
The United States and other countries sometimes use trade sanctions to punish foreign governments that are bad actors on the world stage. Quotas and other domestic trade restrictions punish Americans in the same way that trade sanctions punish foreign countries: by distorting markets, raising prices paid by consumers, and depriving people of needed goods.
Import quotas are a common feature of centrally planned economies like Venezuela, which imposed import quotas under socialist leaders Hugo Chavez and Nicolas Maduro. In , the Chavez regime implemented import quotas in a misguided effort to boost domestic producers.
Venezuela also imposed quotas on automobile imports in to promote domestic automobile manufacturing. The results of such policies were predictable. Like Venezuela, the United States has occasionally restricted imports by using tariff-rate quotas, which impose hefty tariffs on imports once a specific threshold has been met.
Your Practice. Popular Courses. Economy Economics. What Is a Quota? Key Takeaways Countries use quotas in international trade to help regulate the volume of trade between them and other countries. Within the United States, there are three forms of quotas: absolute, tariff-rate, and tariff-preference level.
Tariffs are taxes one country imposes on the goods and services imported from another country. Because tariffs increase the cost of imported goods and services, they make them less attractive to domestic consumers. Highly restrictive quotas coupled with high tariffs can lead to trade disputes and other problems between nations. Article Sources. Investopedia requires writers to use primary sources to support their work.
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Investopedia does not include all offers available in the marketplace. Related Terms What Is Trade? A basic economic concept that involves multiple parties participating in the voluntary negotiation. Some items under a tariff rate quota in the United States include tuna, olives, and ethyl alcohol. There are also tariff quotas applied to imports from specific countries.
For example, the U. During the Great Depression, many countries used import quotas to restrict trade and protect domestic businesses. The League of Nations estimated that some countries, such as France and Switzerland, imposed tariff quotas on more than half of the goods imported during the Great Depression. Import quotas work by limiting the number or value of a product that a country imports brings into a country.
Quotas can apply to all exporters equally, or exporters can each have their allowance that they can fill. Quotas can be hard for the imposing country to manage because they require adequate import controls and proper record-keeping. When a country wants to export goods to the nation imposing a quota, it ships the goods as usual. When the products arrive, local customs look over the shipment to determine what products are being imported.
In the United States, Customs and Border Patrol handles most of the administration of quotas and the checking of imports. When a good arrives at a port or other entry to the country, customs checks the shipment and notes the number of units included and the total value.
If the goods are under a tariff quota, it applies the tariff rate based on whether the imports have met the quota or not. For an absolute quota, customs either allows or blocks the import of the good. If a country tries to import a good after it meets the absolute quota for that good, it has a few options. One option is to return the shipment to the sender.
It can also store the product in a licensed warehouse until the next quota period starts. Once the new period begins, it can import the items. Finally, it can agree to have the shipment destroyed under the supervision of customs. The idea of a quota is to protect domestic businesses from foreign competition. If firms in another country can produce a product at a lower cost or with higher quality than local firms, it can be difficult for the local companies to handle the foreign competition.
This means that the primary beneficiary of import quotas are domestic businesses. They could sell more units of a product at a higher price than they would be able to if no restrictions were in place. The groups that feel adverse effects from quotas are exporters and consumers.
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