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Tariffs, Import Quotas & Trade Quotas

Learn about import quotas and tariffs and see how they work. Compare import vs. domestic products and explore how tariffs and quotas protect the...

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Tariffs, Import Quotas, & Trade Quotas

Ivan Kennedy, Aaron Hill

Learn about import quotas and tariffs and see how they work. Compare import vs. domestic products and explore how tariffs and quotas protect the domestic economy. Updated: 04/20/2022

Table of Contents

Tariffs & Import Quotas

How Do Tariffs Impact the Economy?

Trade Quota Impact on the Economy

Other Effects of Tariffs & Quotas

Lesson Summary Show

Frequently Asked Questions

What is an import vs a domestic good?

An import is a commodity that is not produced or manufactured in a particular country that intends to avail the commodity into its country. In contrast, a domestic commodity describes the product that is produced in the home country. Therefore, imports cross national borders, while domestic products do not cross the national borders.

What is an example of an import quota?

An example of an import quota is when the United States limits the importation of medical products from China by a given percentage. The limitation of import goods into a country is primarily geared towards protecting the local industries.

What is a quota in international trade?

A quota is a numerical limit that a government imposes in the economy to influence the quantity of a commodity that the country can import. This means that when a quota is imposed, a restriction is put in place to determine the limit to which certain commodities can be imported into a country.

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Tariffs & Import Quotas

Tariffs are described as levies that a government imposes on imports entering a country. The government does this by passing on the tax to the consumers by heightening the commodities' prices. An import quota infers the numerical limit set to determine the quantity of a commodity that can be imported into a country. It is a trade restriction that the government puts in place to minimize the importation of a particular commodity over a given period.

Tariffs and quotas are established to react to international trade and its effects. International trade often translates to an upswing in the quantity of commodities that consumers have to choose from, thus heightening competition since the prices of those commodities decline. However, domestic industries do not always benefit from this, hence the need to implement policies to counteract the negative impacts of these activities.

This brings about the concept of tariffs and quotas, where tariffs are enacted to of the imported goods to limit their exportation, and quotas are established to of imports into the country. By doing this, the domestic economy is protected, jobs are heightened since adequate production is taking place in the economy, and competition is prevented because of the minimal foreign goods in the country.

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How Do Tariffs Impact the Economy?

Tariffs are imposed on an economy as taxes that either protect the domestic industry or heighten the economy's revenue. This is achieved by lowering the supply of foreign commodities and increasing their prices. The imposition of the tax leaves the burden of the tax on consumers to pay because it is reflected through an increment in prices. Therefore, when prices increase, the demand for the commodities falls, lowering their supply from foreign countries.

When prices rise, the consumers in the home country are the ones that feel the burden, and this translates to a decline in consumer surplus. However, the domestic producers are affected positively as they receive protection from cheap imports and higher prices due to the tariff's imposition. The domestic economy is protected as well as jobs due to an upswing in the market share. However, the increased producer surplus is often lesser than the reduced consumer surplus, causing a welfare loss in the economy.

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Trade Quota Impact on the Economy

Trade quotas are the limitations that governments establish to curb the quantity of commodities to be imported into a country. The imposition of quotas aims to protect the domestic industries and producers from high competition from foreign producers. Quotas work by putting limits on the number of commodities for importation. By doing so, the domestic market is hedged from experiencing high competition from foreign commodities because most overseas products have low production costs, rendering them cheaper than domestic commodities.

Foreign producers sell large quantities of their cheap commodities to foreign countries to gain the market's attention and shift their attention and focus from their domestic producers, who may be selling the same commodities at higher prices. Therefore, when quotas are imposed, the supply of foreign goods is lowered, increasing their prices. The quotas concept is usually in line with the law of demand and supply, so the prices heighten and the supply declines, just like in tariffs.

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Tariffs and Quotas: Meaning, Types & Effects

Tariffs and Quotas: ✓ Meaning ✓ Advantages ✓ Disadvantages ✓ Difference ✓ Effects ✓ Examples ✓ StudySmarter Original

Tariffs and Quotas

TABLE OF CONTENTS

When you read the words "tariffs and quotas", what comes to your mind first? You may have heard about these in the news during the recent trade wars when the US imposed new tariffs and quotas on imports from other countries. But tariffs and quotas have existed long before Trump's trade wars. In fact, tariffs and quotas are two common forms of trade restrictions. You wonder about how they are different and how they affect the domestic market? Then read on!

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Tariffs and quotas definition

Tariffs are taxes on imports. The government often charges tariffs as a percentage of the imports' value, and the tariffs are paid by the importers.Quotas are quantity limits of imports. When the government imposes a quota on a product, it tells importers that they can only import up to this amount of that product into the country.

Difference between tariffs and quotas

Both tariffs and quotas increase the equilibrium price and decrease the equilibrium quantity in the domestic market, compared to free trade. However, tariffs and quotas work in different ways. Tariffs directly make imported products more expensive by adding a tax on them, and quotas directly reduce the quantity of imports by limiting how many of them can come into the country.

These two measures also have different implications for government revenue: with tariffs, importers of the taxed products have to make payments to the government; with quotas, no one has to explicitly make a payment to the government - and the importers that get to import the products under the quota system capture this rent. Quotas may also be harder to implement than tariffs, as the government has to constantly monitor the quantity of the imports limited by the quotas.

With the important difference between tariffs and quotas, we have to be a little careful when we show their effects on a graph. We will show you how to graph them, and this may be important to know for your exams

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Types of tariffs and quotas

The most common form of tariffs is called ad valorem tariffs: the government charges tariffs as a percentage of the value of the imports. There are other forms of tariffs, and here are a few examples: 1

Specific tariffs: tariffs that are based on the physical quantity of the products. For example, the government can charge a $1 tariff per kilogram of cheese.

Mixed tariffs: a mixed system where either the ad valorem tariff or the specific tariff applies. For example, the tariff on cheese can be at either $1 per kilogram or 20% of the value, and the government charges the one that results in a higher amount.

Compound tariffs: a combination of ad valorem tariffs and specific tariffs. For example, the government can charge a tariff on cheese at $0.50 per kilogram plus 10% of its value.

The most common form of quotas is called absolute quotas: only a certain quantity of the products can enter the country within the quota period (usually a quarter and sometimes a year). Quota can also take the form of voluntary export restrain, meaning that the exporting country will enforce the quota limits after making an agreement with the importing country. In the US, there are two other types of import quotas: 2

Tariff-rate quotas: these allow a certain amount of products to enter the country at a lower tariff rate; after the imported quantity exceeds this amount, the government charges a higher tariff rate.

Tariff preference levels: these are established by free trade agreements and other special trade legislations for certain products, and they work in a similar way as tariff-rate quotas.

Examples of government tariffs and quotas

A good example of tariffs and quotas comes from the recent trade disputes involving steel and aluminum between the US and other countries. In 2018, in order to protect the domestic industries from foreign imports of steel and aluminum products, the Trump administration imposed a 25 percent tariff on certain steel products and a 10 percent tariff on certain aluminum products.3 These are examples of ad valorem tariffs since they are charged as a percentage of the value of the imports.

In order to avoid those tariffs, South Korea, Brazil, and Argentina made agreements with the US to impose quotas instead on some of their steel exports based on their average export volumes from the three years before. As a result of these quotas, the amounts of steel that the US imported from these three countries in 2018 dropped significantly from their 2017 levels. 3

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Effects of tariffs and quotas on international trade

Let's show how tariffs and quotas affect the market equilibrium with graphs - our favorite tool! Here, we are discussing how imposing tariffs and quotas on certain products will affect the domestic market of those products (how they affect domestic producers and consumers of those products). But keep in mind that the effects of tariffs and quotas don't end here. There are domestic producers who rely on imported inputs for their production, and now they face higher prices. Also, the foreign countries will likely choose to retaliate by imposing tariffs or quotas on other goods that our country exports, so our exporters will suffer.

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How Do Tariffs Protect Domestic Industries?

Discover how tariffs are used by a domestic government to protect its domestic industries, how they are levied, and whether or not they are effective.

FISCAL POLICY TAX LAWS

How Do Tariffs Protect Domestic Industries?

By EVAN TARVER Updated June 19, 2022

Reviewed by EBONY HOWARD

Fact checked by TIMOTHY LI

Tariffs are taxes on imports. They effectively raise the prices of those imports, providing an edge to domestic companies in the same markets. Governments usually impose tariffs to help domestic companies, or sometimes to punish foreign competitors for unfair trading practices. However, tariffs can also have harmful consequences for domestic companies, especially ones in related industries, as well as consumers.

Understanding Tariffs

Tariffs are paid by importing businesses to their own government, with most costs passed on to consumers of those goods or services somewhere down the line. Tariffs are not paid by foreign companies that produced the goods or the governments of their home countries. Tariffs are usually used to protect struggling domestic industries against foreign competition or unfair practices such as dumping and foreign government subsidies.

There are two basic types of tariff: an ad valorem tax and a specific tariff. An ad valorem tax, the most common type, is levied as a percentage of the value of the good or service. A specific tariff sets a fixed fee by weight or number of items.

KEY TAKEAWAYS

Tariffs are a tax on imports paid by importing companies in the country that imposed the tax. The cost is usually passed on to consumers.

Tariffs are meant to protect domestic industries by raising prices on their competitors' products.

However, tariffs can also hurt domestic companies in related industries while raising prices for consumers.

Tariffs can also erode competitiveness in the protected industries.

The Declining Use of Tariffs

Most economists believe tariffs hinder trade and economic growth while raising prices for consumers in tariff-implementing countries. This is why their use has fallen dramatically since World War II. The average level of tariffs on industrial goods has fallen from about 40% at the end of the war to about 2% today.

1

Still, most countries maintain at least small tariffs on some goods, especially ones of special domestic importance. The U.S., for example, still keeps a tariff of 25% on light pickup trucks,

2

while the European Union maintains a 10% import tax on cars from the U.S. and other countries.

3

Steel and the Ripple Effects of Tariffs

Ex-President Donald Trump's steel tariffs illustrate one-way tariffs can be harmful as well as helpful.

4

The U.S. steel industry has for years suffered from unfair trading practices overseas, particularly government subsidies that enabled Chinese producers to dump steel at low prices. In 2018, Trump imposed tariffs of 25% on steel imports in an effort to protect the domestic industry, including factory jobs in important "rust belt" swing states such as Pennsylvania.

5

While those tariffs have helped U.S. steelmakers, they have forced many U.S. companies that need steel for their products—especially automakers—to pay higher prices. This, in turn, can lead to higher prices for those downstream products and threaten jobs in downstream industries.

6

As of May 2021, there were approximately 69,000 U.S. steelworkers.

7

Tariffs and Higher Prices for Consumers

Trump's washing machine tariffs show how import taxes can raise consumer prices—and not just on the targeted imports. Research by the University of Chicago and the U.S. Federal Reserve found that while the washing machine tariffs brought in $82 million a year to the U.S. Treasury, the cost to U.S. consumers was $1.5 billion a year.

8

That's because U.S. producers raised their prices on washing machines and a range of other goods.

The washing machine tariffs helped create about 1,800 manufacturing jobs, the Fed concluded, but the cost to the U.S. as a whole was about $817,000 per job.

8

The Bottom Line on Tariffs

As illustrated above, tariffs often end up hurting other domestic companies in related industries as well as consumers. Yet many economists also argue that they often protect weak companies that should be allowed to fail, and over the longer term they erode the competitiveness of viable companies because those companies aren't forced to compete on an even playing field with foreign firms.

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