Import Quotas

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

Import quota helps protect the domestic market by generating local business of a country. This helps maintain the balance of payments equilibrium and keep the country's GDP in check. However, it may put the nation at the risk of retaliation from foreign markets through high tariffs on exports.

• Import quotas are government-imposed restrictions on the trade of a particular commodity, aiming to either limit its quantity annually or protect domestic producers.
• There are two types of import quotas: absolute quotas, which set a maximum quantity allowed for importation, and tariff rate quotas, which allow imports up to a certain limit at a lower tariff rate and higher tariffs beyond that limit.
• Import quotas can help regulate the balance of payments and control a country's GDP. Still, they may also expose the nation to retaliatory measures from foreign markets through higher tariffs on exports.

Import quotas can be described as the fixation on the maximum quantity of any particular commodity imported in that country, usually implemented to protect domestic industries and vulnerable producers.

It protects countries’ domestic market from getting flooded with imported goods which are 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 the exporter party.

However, this import restriction may affect consumer sentiment as they may not be getting goods at a cheaper cost.

The governments of different countries keep a regular check on the number of imported goods. Following the law of demand and supply, the cost of goods whose supply has been limited will see a surge in price.

It will limit the supply and shift the supply curve to the left. Subsequently, the new equilibrium quantity would be set, which will be lower than the natural equilibrium without quota.

Hence imposing quotas will increase the price of goods, eliminating the competitiveness from the foreign market. Although on the negative side, imposing quotas on import limits the choices available to consumers, which leads them to pay higher prices for certain goods.

Let us look at the purpose of imposition of import quotas in goods.

• The main objective is to protect the domestic market from foreign goods by limiting importing goods from the overseas market.
• Ensure that the internal price level stabilizes 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 negative balance of payments.
• To preserve the limited foreign exchange resources of the country and make their use for higher priority items.
• To discourage unnecessary consumption by the rich sections by placing restrictions on the import of luxury items.

For instance, the United States limits the number of Chinese car imports to 3 million per year. The imposition of import quotas 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. It helps increase the country's GDP and the wealth of domestic suppliers.

However, the domestic suppliers might sell the car at higher prices which may harm consumers and lead to retaliation from foreign countries by placing tariffs on US exports.

#1 - Absolute Quota

An absolute quota limits the number of specific goods imported by a country during a specific period. No other 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, the initial quota of a product is allowed to be imported at a lower rate. Once the quota is surpassed, goods may further be imported at a higher tariff rate.

1. Protective or Production Effect - As the import quota reduces the imports, it has a protective effect on domestic producers, which helps them increase their production of import substitutes. This increased domestic production is called a protective or production effect. This helps the domestic market sustain, expand and grow.
2. Consumption Effect - There is a surge in the price of domestically produced commodities once the import quota is prescribed. It leads to 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 product's availability in the market, creating a shortage and consequently a price rise.
4. Revenue Effect - The revenue effect is complex and difficult to comprehend. Accordingly, this effect is either captured by domestic or foreign importers or shared by both in some proportion.
5. Balance of Payments Effect - It helps reduce the balance of payment deficit by limiting the imports whose portion of income can be utilized for investment in export or import substitution.

Later we will try to understand the pros and cons of import quotas.

• It acts as a boost for local goods manufacturers. The countries with import quotas can produce more of those goods and in turn increase their sales and revenue. This helps them to grow their own business.
• Even if the demand for imported material increases, the quota helps keep the volume of imports completely unchanged. Thus, here, the local producers use the rise in demand as an opportunity to expand their production and which in turn helps the economy to flourish.
• Better technology and innovation is used to expand supply to meet the rising demand of local consumers. This positively affects not only that sector by various other sectors which are directly or indirectly related to it.
• It helps in reducing deficits in the balance of payments. In this case, import is less than export. Thus, the gap in the balance of payments reduce, which is extremely beneficial for the economy.
• It helps save foreign exchange for further spending at the time of emergency. The government is able to save a lot of foreign exchange which would otherwise have gone into paying for imports of products that can very well be manufactured within the country itself.
• The outcome of a quota is more certain, precise, and specific. It is a planned strategy that is bound to positively influence the economy.
• Quotas are more flexible and easier to impose. . The government can easily put the restriction in the concerned goods and services to benefit local producers.

• Quota may lead to corruption in the countries with import quotas as the officer in charge of the allocation of licenses may become prone to bribery. This may lead to unnecessary wastage of resources and legal consequences.
• The dealers with import licenses tend to create monopoly profit, which further leads to a loss of consumer welfare.
• The import quota system distorts international trade as its effects are more vigorous and arbitrary. Countries wanting to export their goods to the domestic economy will be stopped due to the restrictions imposed on them. This will create a hindrance in the trading and expansion opportunity of both countries.
• Exporter countries may take this adversely and affect trade relations between the two countries. This is obvious since now the exporter cannot sell their goods in the country imposing quota which means losing a big market to earn revenue. This will affect inter country relationships.

Thus the above details gave a clear understanding about the pros and cons of import quotas.

An import tariff is a tax imposed by the government on importing certain products. With the increase in the tariff rate on a commodity, the 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 system limits the number of goods imported in the country. It reduces the quantity or value of goods imported and a lesser variety of products for the consumer—local manufacturers/traders' income increases from the products domestically produced due to the imposition of quota.

This has been a guide to what are Import Quotas. We explain them with example, effects, types, differences with import tariff, purpose & advantages. You may learn more about financing from the following articles –

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