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What’s it? An import quota is an import policy that limits the quantity of product imports over a certain period. The government implemented it to protect domestic industries that were vulnerable to pressure from imported products. It is also retaliation for a similar policy by a partner country.
Import quotas are one of the non-tariff trade barriers in addition to subsidies and embargoes.
Why countries use import quotas
The government tries to protect domestic industries by limiting the quantity of imports. Producers in partner countries may adopt unfair trade practices.
Foreign producers may deliberately try to force domestic producers out of the competition. They sell at a price below the domestic market price.
Indeed, cheaper imported products may be due to lower production costs. However, foreign producers may also deliberately dump. They sell to foreign markets at a lower price than those sold in their domestic market.
Dumping hurts the domestic market. High imports increase pressure on domestic producers and make them less competitive.
As a result, imported products began to shift the position of domestic products. Domestic consumers are starting to switch from domestic products to get lower prices.
Imported products then capture more sales and leave less share for domestic producers. In the long run, conditions are likely to turn off domestic producers.
To prevent this, the government can implement trade barriers. One option is to impose import quotas.
Quotas limit the quantity of imports allowed to enter the domestic territory. The lower quantity of imports eases competitive pressure. However, that raises another problem, namely shortage.
Apart from protecting domestic industries, another purpose of import quotas is to save foreign exchange reserves and lessen pressure on the balance of payments. High imports put pressure on the trade balance. That can result in a deficit if exports don’t grow at an equal rate. A deficit means that the incoming currency is lower (proceeds from exports) than is exiting (to pay for imports). That ultimately drained foreign currency reserves to pay for imports.
Import quota vs. import tariff
Quotas are different from import tariffs. Under the quota, the government limits the quantity of the product. Meanwhile, import tariffs are levies on the price of imported products.
Import quotas only affect the quantity and do not increase the price of imported products. Conversely, import tariffs increase the price of imported products.
Quotas produce shortages in the domestic market, whereas tariffs do not.
The government enforces both to protect the domestic economy. For the government, tariffs are a source of revenue for the fiscal budget. But the quota is not.
For foreign producers, tariffs are costs. Their goods are becoming more expensive and less competitive in the domestic market. Conversely, quotas mean their sales volume is lower.
How import quotas work
Under the import quota, the government limits the quantity of imports. The government usually appoints several importers to ship goods from abroad and then sets a limit on how much they can import.
Say, before the quota policy took effect, the importer shipped 100 tonnes. Due to high demand, they then increased the import quantity to 200 tons.
High imports increase supply in the domestic market. Feeling that imported products threaten their position, domestic producers pressure the government to impose import quotas.
If the government agrees, it will then issue a quota policy and limit imports to 90 tons. Indeed, with the new quota, the government protects domestic producers. But that also raises another problem. Domestic supply is reduced. The shortage is up to 110 tonnes (200 tonnes—90 tonnes) in the above case.
Note: In microeconomics, another term for the shortage is excess demand, a condition in which demand exceeds supply.
Following the law of supply-demand, a decrease in supply pushes up the domestic market price. Of course, this is detrimental to consumers. Let’s draw the situation on a graph.
Before the quota took effect, domestic supply was in Q1. Due to smaller imports, supply was reduced to Q2 after the quota policy came into effect. The supply curve shifts to the left.
Assuming demand is constant, less supply will push the price up from P1 to P2. As a result, domestic consumers have to pay higher prices.
Consumers also have fewer choices. Imported goods may offer some features that are unavailable in domestic products.
To deal with rising prices, the government should encourage domestic producers to increase production. Say, domestic production increases as much as the quantity of imports decreases (Q1 minus Q2). Market prices should fall back to previous levels, assuming that demand is unchanged.
Types of import quota
Import quotas can vary. The government may impose a fixed quota, which limits the maximum amount that can be imported. In the example above, the government limits imports to only 90 tonnes.
Furthermore, the government can also apply a tariff-rate quota. The government still allows imports over the quota but has to pay high import duties for each additional quantity.
For example, suppose the import quota is 90 tonnes, and the importer pays a duty of 6%. They can import more than 90 tonnes but must pay an import duty of 15%.
In short, tariff-rate quotas are a combination of import quotas and import tariffs.
Other types of import quotas are:
- Voluntary export restraints
- Hidden quotas
Voluntary export restraints
Voluntary export restraints (VERs) are voluntary quotas adopted by exporting countries. They contrast with conventional quotas, where the importing country imposes the quota.
VERs are mutually beneficial between the countries involved. And why are exporting countries willing to do so? Isn’t that detrimental to their producers?
Import quotas are a protectionist measure. It tends to provoke retaliation from exporting countries. Worsening trade relations could lead to trade wars.
Say, the United States imposes import quotas on Chinese products. Because it hurts domestic producers, the Chinese government would adopt a similar policy and limit imports of products from the United States. The situation gave rise to a prolonged trade dispute.
To deal with worsening conditions, the United States can negotiate a VER with China. The two countries come into a bilateral agreement. China agreed to impose quotas for its exports to the United States.
Why did China agree? China may think that is the best solution. If China does not implement a VER, the United States could adopt a stricter policy. The United States could retaliate through quotas and other trade barriers, such as import tariffs.
VERs are an effective tactic for reducing trade disputes, which eases geopolitical tensions. As international trade changes, the countries involved will usually update the VER to keep it useful.
Hidden quotas
The government can limit the supply of imported goods without explicitly imposing import quotas. For example, the government may impose stricter requirements or quality controls on certain imported products.
Although relatively simple, however, such a policy is quite effective, mainly if it targets low-quality goods.
Another form of hidden quotas is to increase propaganda campaigns to encourage domestic consumers to reduce their consumption of imported goods. For example, the government could open propaganda about how imports could cause health problems.
One example is the European Union’s campaign on environmentally friendly vegetable oils. Such campaigns have proven effective in reducing demand for palm oil from countries such as Indonesia, which are considered environmentally unfriendly in their production.
Pros and cons of import quotas
Governments sometimes resort to import quotas, which are restrictions on the quantity of specific goods that can enter a country. This approach can be a tool to achieve certain economic goals, but it’s important to understand the impact on different stakeholders.
Pros
Precise control over imports: Unlike tariffs, which can be mitigated by subsidies offered by exporting countries, quotas establish a firm cap on import volumes. This predictability allows governments to strategically manage import levels and shield domestic industries from sudden surges of foreign competition. This control can be particularly valuable in sectors deemed critical for national security or cultural identity.
Nurturing domestic industries: By limiting the influx of cheaper foreign goods, quotas create a more sheltered environment for domestic producers. This breathing room can be crucial for fledgling industries to establish themselves and develop a competitive edge. For existing industries facing competition from rivals who benefit from lower production costs abroad, quotas can provide temporary protection while they invest in innovation and efficiency improvements.
Cons
However, import quotas are not without drawbacks, and their impact can ripple through the entire economy:
Higher consumer prices: With a restricted supply of imported goods, domestic producers often face less pressure to compete on price. This can lead to complacency and a lack of incentive to innovate or improve efficiency. Consumers, meanwhile, may end up paying more for goods they previously enjoyed at lower prices due to import competition. This can lead to a decline in consumer welfare and a dampening effect on overall economic growth.
Lost government revenue: Unlike tariffs, which act as a tax on imported goods and generate revenue for the government, quotas do not provide any financial gain for the government itself. This can be a significant missed opportunity, especially for countries seeking to boost their coffers. The revenue generated from tariffs can be used to fund public services, invest in infrastructure, or even be redistributed to consumers to offset potential price increases.
Unequal opportunities for importers: The process of allocating quotas can be susceptible to favoritism, distorting the import landscape. Governments may grant larger quotas to state-owned enterprises or specific industries, giving them an unfair advantage over private importers. This lack of a level playing field can stifle competition and hinder overall economic efficiency. Additionally, quotas can create an administrative burden for businesses as they navigate the process of obtaining and managing quotas.
Inflexibility in a dynamic market: Import quotas struggle to adapt to the ever-changing nature of global markets. They don’t take into account fluctuations in currency exchange rates or consumer demand. For instance, a weakening domestic currency might make imports cheaper, potentially leading to higher demand.
However, with a quota in place, this wouldn’t necessarily translate to more imported goods being available. This inflexibility can create inefficiencies and hinder the economy’s ability to respond to market shifts. Additionally, quotas can lead to retaliation from trading partners, escalating trade tensions and potentially triggering trade wars.
