Quota

What Is Quota?

Quota in trade signifies the quantity or amount of goods that can be imported or exported between two countries during a specific time. The government imposes a trade restriction to regulate trade volume between countries. These are generally a product of protectionism policies.

Governments impose it for different reasons, from safety concerns to price regulation, from boosting the domestic economy and export to regulating demand and supply. It acts like a nontariff barrier to restrict trade, although other trade restrictions exist, such as sanctions, embargoes, and levies. Producers and consumers face the most adverse effects of it in the market.

• A quota is a trade restriction on the amount or number of goods imported or exported between countries for a specific time.
• There are primarily three categories: absolute, tariff rate, and tariff preferences, alongside production, import, and export restrictions.
• These measures aid in price control, trade volume oversight, supply and demand management, and the development of robust trade connections.
• Moreover, they serve as a revenue source for governments and stimulate domestic production.

How Does Quota Work?

The quota definition states that it serves as a form of trade policy and tool to regulate prices, manage the demand and supply chain of commodities and goods, and is observed as a technique to boost domestic production and utility. They are of different types and are introduced at different levels. Here are some of them.

• Production quota - It is a supply restriction imposed to increase the price of commodities by creating a shortage.
• Import quota – It limits the amount of goods or quantities imported into a country for a specific time.
• Export quota – It is where the restriction is implied on the quantity or amount of goods that can be exported outside the country.
• Absolute quota - In this type, once the set import amount is reached, no more import can be made during the set period.
• Tariff rate quota - This allows a specific quantity of goods to be imported at a reduced tariff tax rate; after this limit is reached, the tariff rate increases.

Examples

Let us understand the concept through some hypothetical and real-world examples.

Example #1

Let us assume that a hypothetical country restricts the number of mangoes imported. If the demand for mangoes in the country is 27,000 pounds and the current international market price for one pound of mangoes is $1.35. Upon introducing an import quota, the country imposes restriction and allows importing only 18000 pounds of mangoes.

When this happens, it hikes the domestic price to $1.89 per pound of mangoes. At this price, the domestic farmers of the country can afford to increase their production from 4000 to 9000 pounds. At the same time, at the price of $1.89 per pound, the country's demand for mangoes declines to 25000 pounds. In this example, the restriction helps domestic mango farmers increase production and decrease demand through price regulation.

Example #2

The wheat export quota implemented by India has prompted Nepal's flour industry to adapt and innovate. It was introduced in response to concerns about reduced wheat production due to heatwaves in India, but it has spurred resilience in Nepali flour mills. Nepal, which primarily sources wheat from India, initially received a partial quota allocation, leading to concerns about potential price increases.

In response to this situation, calls have been made for the Nepali government to engage in constructive dialogue with India to secure 200,000 tonnes of wheat, which could help mitigate potential shortages. While the initial quota allocation did offer some relief by reducing flour prices, industry leaders are now advocating for a comprehensive, long-term solution, recognizing that domestic production alone may not suffice to meet the demand.

Effects

These trade limitations have far-reaching consequences that encompass various aspects of international commerce, affecting not only the volume and variety of goods available to consumers but also the pricing dynamics, market equilibrium, and the overarching regulatory role of governments in both domestic and international trade scenarios. Let us understand them.

• It introduces a trade barrier among countries and, more importantly, between businesses.
• With limited quantities and trade restrictions, consumers need more options in the market.
• The price of domestic products increases that customers in the market incur.
• It induces deadweight loss and consumer surplus.
• Government regulations help authorities regulate prices and monitor trade volume in the international and domestic markets.

Advantages and Disadvantages

Here are some of the benefits of such trade restrictions -

• These trade restrictions encourage domestic production and boost the use of domestic resources and products in the market and society.
• The impositions restrict domestic markets from getting overburdened by foreign goods that are usually cheap because of low overseas production costs.
• These limitations help governments supervise, introduce new trade policies, and monitor trade volume between countries.
• In the case of export quota, governments can keep the optimum supply running and keep domestic prices lower for consumers.

Here are some of the drawbacks of such trade restrictions -

• Corporations with a capitalistic mindset observe it as a trade restriction.
• These may ignite trade war between countries.
• These trade impositions make imported goods expensive for consumers.
• They hurt economies and are not good for socio-political relationships between nations.

Quota vs Tariff

The key distinctions between each lie in their nature and economic impact. Let's understand them clearly.

• Quotas are restrictions on the trade quantity, whereas tariffs are taxes imposed on imported goods.
• Quotas are evident across various sectors of the economy, whereas tariffs are primarily applicable to import-related transactions.
• Import quotas help foreign producers earn revenue in the form of rents. In comparison, tariffs do not bring any profit to foreign exports and domestic importers.
• Quotas increase prices in artificial shortage. On the other hand, tariffs are a form of revenue generation for governments.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a guide to what is Quota. Here, we explain the concept along with its examples, comparison with tariff, effects, advantages & disadvantages. You can learn more about it from the following articles –

• Regional Trade Agreements
• Deglobalization
• Percentage Of Completion Method