Quotas and tariffs

There are two types of protection; tariffs, which are taxes, or duties, on imported goods
designed to raise the price to the level of, or above the existing domestic price, and non-tariff
barriers, which include all other barriers, such as:

Quotas
A quota is a limit to the quantity coming into a country.

With no trade, equilibrium market price in the country will exist at the price which equates
domestic demand and domestic supply, at P, and with output at Q. However, the world price
is likely to be lower, at P1, than the price in a country that does not trade. If the country is
opened up to free trade from the rest of the world, the world supply curve will be perfectly
elastic at the world price, P1.
The new equilibrium price is P1 and output is Q1. The domestic share of output is now
Q2,compared with Q, the self-sufficient quantity. The amount imported is the distance Q2 to
Q1.
Imposing a quota
In an attempt to protect domestic producers, a quota of Q2 to Q3 may be imposed on imports.

Go to: Extension task . One of the key differences between a tariff and a quota is that the welfare loss associated with a quota may be greater because there is no tax revenue earned by a government.This enables the domestic share of output to rise to 0 to Q2. plus Q3 to Q4. The amount imported falls to the quota level. quotas are less frequently used than tariffs. It is this price rise that provides an incentive for less efficient domestic firms to increase their output. with total output falling to Q4. Because of this. The quota creates a relative shortage and drives the price up to P2.

If a country opens up to world supply. In contrast.Tariffs Tariffs. with the quantity imported Q1 to Q2. they also suffer a loss of consumer surplus. Domestic producers share of the market rise to Q4. there is a gain in domestic producer surplus as producers are protected from cheap imports. price falls to P1. The result is that domestic producers have been protected from cheaper imports from the rest of the World. As a result. The price rises to P2. Without trade. Tariffs are one of the oldest and most pervasive forms of protection and barrier to trade. and the new output is at Q3. However. domestic producers increase their producer surplus as they receive a . the domestic price and quantity are P & Q. However. domestic producers’ share falls to Q1 and imports now dominate. which also means that there is a loss of consumer surplus. levied as a percentage increase on the price of the imported product. or customs duties. The imposition of a tariff shifts up the world supply curve to World Supply + Tariff. are taxes on imported products. and receive a higher price than they would have without the tariff. it is likely that there is an overall net welfare loss. and output increases from Q to Q2. usually in an ad valorem form. The impact of tariffs The imposition of tariffs leads to the following: Higher prices Domestic consumers face higher prices. and imports fall to Q4 to Q3. Given that domestic consumers face higher prices.

The net welfare loss is represented by the triangles X and Y. Retaliation There is the likelihood of retaliation from exporting countries. infant and declining industries. Selective tariffs may also help reduce a trade deficit. Tariffs may also help conserve a non-renewable scarce resource. New protectionism In addition to tariffs and quotas.higher price than they would have without the tariff. Despite the relative success of the WTO in .N) there is still a net loss. and strategic goods. whereby a tariff alters the cost advantage that countries may have built up through specialisation. in the short run tariffs may protect jobs. Increased market share also means that jobs will be protected in the domestic economy.M.L. which could trigger a costly trade war. However. there are several other barriers that national governments may use to limit imports or stimulate exports. Distortion There is a potential distortion of the principle of comparative advantage. Even when adding the tariff revenue (area K. the reduction in consumer surplus is greater than the increase in producer surplus. and reduce consumption. Welfare loss However.

and to arbitrate over disputes. and somewhat hidden from view. For example. goods may be deliberately held-up at ports and airports. barriers still exist. such as banning the import of a product on health or safety grounds. Health and safety grounds National governments can also use health and safety regulations to discriminate against imported products. national or local governments may purchase supplies of military or medical equipment from local firms. Bureaucracy Excessive bureaucracy associated with the process of importing and exporting may also restrict trade. For example. While many WTO members have signed up to the GPA (Government Procurement Agreement). Such subsidies may be in the form of start-up or 'launch' aid. where national governments favour local firms. which may be given to larger projects. Domestic subsidies Governments may also give subsidies to domestic firms. the majority have not signed up to initiatives to make national public procurement more open to overseas competition.encouraging multi-lateral negotiations to reduce tariff barriers. This financial support can also be in the form of an export subsidy. such as the EU with its Airbus development. which can then be used to help reduce price and deter imports. Examples include the following: Government favouring domestic firms Countries can protect their domestic industries by employing public procurement policies. while local producers do not have to pass such stringent tests. governments can set tough quality standards that may be difficult for overseas producers to meet. providing an incentive for firms to export. Exchange rates Monetary protection involves countries deliberately devaluing their exchange rate to stimulate exports and deter imports . and the US with its support for Boeing. and there may be unnecessarily complex and lengthy paperwork associated with international transactions. Quality standards In a similar way. but are becoming harder to detect.