Import Quotas Definition Example How It Works

Import Quotas Definition

Explanation

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.

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Objectives of Import Quotas

The main objective is to protect the domestic market from foreign goods by limiting importing goods from the overseas market.To ensure 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 tariffTariffA tariff is levied by a government on the import of goods or services from another country. The charges increase government revenue, restrict trade with other countries, and protect domestic manufacturers from stiff competition.read more 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.

How Does Import Quotas Work?

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 quantityEquilibrium QuantityEquilibrium quantity refers to the quantity demanded and supplied when there is equal supply and demand in the market. It appears at the equilibrium point when there is neither shortage nor surplus of the specific product happens.read more 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 imports limits the choices available to consumers, which leads them to pay higher prices for certain goods.

Example of Import Quotas

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. 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.

Types of Import Quotas

#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.

Effects of Import Quotas

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.Consumption Effect – There is a surge in the price of domestically produced commodities once the import quota is prescribed. It led to the reduction of consumption of that commodity.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.Revenue Effect – The revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more 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.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.

Import Quota vs Import Tariffs

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 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.

Advantages

It acts as a boost for local goods manufacturers.Even if the demand for imported material increases, the quota helps keep the volume of imports completely unchanged.It helps in reducing deficits in the balance of payments.It helps save 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, which further leads to a loss of consumer welfare.It distorts international tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. read more as its effects are more vigorous and arbitrary.Exporter countries may take this adversely and affect trade relations between the two countries.

Conclusion

Import quotas can be the form of trade restrictions imposed to reduce the number of goods imported. 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.