Import Quotas

Import Quotas Definition

Import Quotas are a form of restriction imposed by the government on trade of a particular commodity by imposing restriction on either fixed in terms of value or quantity of the product which can be imported during a given period of time usually for one year usually been imposed by the government to provide benefits to local producers.

Explanation

• Import quotas can be described as the fixation on the maximum quantity of any particular commodity which can be imported in that country usually implemented with the motive of protecting domestic industries and vulnerable producers.
• It protects countries’ domestic market from getting flooded with imported goods which is usually cheaper than the same or similar goods produced by local players due to low production cost in the overseas market or high level of efficiency, the expertise of exporter party.
• However, this restriction on imports may affect consumer sentiment as they may not be getting goods at a cheaper cost.

Objectives of Import Quotas

• The main objective is to protect the domestic market from foreign goods by limiting the import of goods from the overseas market.
• To make sure that the internal price level gets stabilized by regulating the procurement of goods from foreign countries.
• To fight against the trade policies adopted by foreign countries.
• To keep a check on the speculative imports in expectancy of variation in tariff rates, exchange rates, and internal money.
• To reduce the deficit in the balance of payment faced by the country. Import quotas help in adjusting the adverse balance of payments.
• To preserve the limited foreign exchange resources of the country and make their use for higher priority items.
• To discourage unnecessary consumptions by the rich sections through placing restrictions on the import of luxury items.

How Does Import Quotas Work?

• The government of different countries keeps a regular check on the number of goods getting imported. On following the law of demand and supply, the cost of goods whose supply has been limited will see a surge in price.
• This will limit the supply and make the supply curve shift to the left. Subsequently, the new equilibrium quantity would be set which will be lower than the natural equilibrium in the absence of quota.
• Hence imposing quotas will increase the price of goods and this eliminates the competitiveness from the foreign market. Although on the negative side, imposing quotas on imports limits the alternative of choices available to consumers which leads them to pay higher prices for certain goods.

Example of Import Quotas

• Say, for instance, the United States limits the number of Chinese car imports to 3 million per year. This import quota on foreign car products will help the domestic car manufacturing companies to increase their production and establish their footprint in the United States market with maximum profit. This helps in increasing the GDP of the country and the wealth of domestic suppliers.
• However, the domestic suppliers might sell the car at higher prices which may put a negative impact on consumers and lead to retaliation from foreign countries by placing tariffs on US exports.

Types of Import Quotas

#1 – Absolute Quota

An absolute quota is a limitation on the number of specific goods that can be imported by a country during a specific time period. No further goods can be imported into the country once the quota has been fulfilled. The absolute quota is set internationally where goods may be imported from any country until the goal has been achieved. The absolute quota is also set selectively for certain countries.

#2 – Tariff Rate Quota

It is a two-tier level quota system that combines features of both tariff and quotas under this system initial quota of a product is allowed to be imported at a lower rate. Once the quota is surpassed, goods may further be imported but at a higher tariff rate.

Effects of Import Quotas

1. Protective or Production Effect – As the import quota reduces the imports it has a protective effect on domestic producers which helps them to increase their production of import substitutes. This increased domestic production is called a protective or production effect.
2. Consumption Effect – There is a surge in the price of domestically produced commodity once the import quota is prescribed this lead in the reduction of consumption of that commodity.
3. Price Effect – As import quota imposes a limitation on the quantity of the product, it restricts the availability of the product in the market creating a shortage and consequently rise in price.
4. Revenue Effect – The revenue effect is complex and difficult to comprehend. Accordingly, this effect is either captured by domestic importers or foreign importers or shared by both in some proportion.
5. Balance of Payments Effect – It helps in reducing the balance of payment deficit by limiting the imports whose portion of income can be utilized in the future for investment in export or import substitution.

Import Quota vs Import Tariffs

• An import tariff is a tax imposed by the government on the import of certain products. With the increase in the tariff rate on a commodity, import of that commodity tends to decline. The government revenue increases with an increase in tariff as it is a direct source of revenue for the government and hence an increase in GDP.
• Whereas import quota is the limitation on the number of goods imported in the country. This leads to a reduction in the quantity or value of goods imported and a lesser variety of products for the consumer. Local manufacturers/ trader’s income increases from the products domestically produced due to the imposition of quota.

Advantages

• It acts as a boost for local goods manufacturers
• Even if the demand for imported material increases the quota helps in keeping the volume of imports completely unchanged.
• It helps in reducing deficits in the balance of payments.
• It helps in saving foreign exchange for further spending at the time of emergency.
• The outcome of a quota is more certain, precise, and specific.
• Quotas are more flexible and easier to impose.

Disadvantages

• Quota may lead to corruption as the officer in charge of the allocation of licenses may become prone to bribery.
• The dealers with import licenses tend to create monopoly profit, this further leads to a loss of consumer welfare.
• It distorts international trade as its effects are more vigorous and arbitrary.
• Exporter countries may take this adversely and can affect trade relations between the two countries.

Conclusion

Import quotas can be said as the form of trade restrictions imposed with the objective of reducing the number of certain goods imported. Import quota helps in protecting the domestic market through generating local business of a country, these help in maintaining the equilibrium of the balance of payments and keeps in check the GDP of the country although it may put the nation at the risk of retaliation from foreign markets through high tariffs on exports.

Recommended Articles

This has been a guide to import quotas and its definition. Here we discuss objectives, types, examples, effects and how do import quotas work along with advantages and disadvantages. You may learn more about financing from the following articles –

• Net Exports
• Net Importer
• GDP Per Capita
• Real GDP
• Penetration Pricing