Tariffs and Quotas

Tariffs and quotas are sometimes imposed to “protect” domestic industry from international competition. The effect of a tariff is similar to any other unit tax: The supply curve price at all quantities is raised by the amount of the tax.

From an economic viewpoint, the protection of domestic industry through tariffs and quotas is a poor notion. The resources used to produce goods domestically must be drawn from other industries, so domestic production is no better than it was. At the same time, the country against which the tariff was imposed will now have less of our currency to trade back to us for our goods. Everyone eventually suffers by paying more for both domestically produced and imported goods, and total world production is reduced. In the short term, workers in the “protected” industry benefit because they do not have to be retrained. But the rest of society is subsidizing these workers at many times their wages/salaries. It would be cheaper to pay them not to work.

A quota is a somewhat different situation. In this case, there is no tax revenue for the government. The supply and demand curves do not change. However, the quantity exchanged is forced to a point below equilibrium. (If this were not the case, there would be no reason to impose the quota.) As a result, trade occurs at a quantity where the price at which suppliers are willing to sell is substantially lower than the price at which purchasers are willing to buy. Importers make out like bandits because they can buy at the low “supply” price and sell at the high “demand” price. Some method will have to be found to allocate the quote between different importers.

If an importer can negotiate an exclusive agreement to supply the domestic market with the entire quota of goods shipped from the foreign producer, then a question of economic rent arises. If the best use of the goods is to export up to the amount of the quota, then the next best use is to sell the goods locally in the country of origin. The amount by which the demand price exceeds the supply price, times the quantity of the quota, is the economic rent of the goods. The importer and the supplier will have to negotiate who gets what percentage of this amount.

From a consumer point of view there is no difference between a tariff and a quota so long as they result in the same final price. The main difference is that under a tariff, the government gets all the extra money; but under a quota, the money will wind up in a combination of the foreign manufacturer, an import business, and perhaps the government if it insitutes some sort of program like selling quota allocations to importers for a fee.