Trade Barriers

Quotas
September 22, 2015

Mercantilists view on Trade

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Mercantilism
The body of writings prevailing during
the 17th and 18th cents. that postulated
that the way for a nation to become
richer was to restrict imports and
stimulate exports. Thus, one nation
could gain only at the expense of other
nations.

QUOTAS

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An import quota is a limit on the

quantity of a good that can be
produced abroad and sold
domestically. It is a type of
protectionist trade restriction that
sets a physical limit on the quantity
of a good that can be imported into
a country in a given period of time.

EXAMPLE:

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The Philippines may permit

import of watches from
Switzerland either specifying
the number of watches, say one
million watches per year, or
specifying the value of watches
to be imported from Switzerland
(say 2.5 Million Euro per year)

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Methods of Fixing Import

Quota
Assuming that the Philippines
has decided to import watches
from Japan at 2.5 M euros per
year

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Methods of Fixing Import

Quota
1.
PH may give import license to import Swiss

watches value at 2.5 M euros per year to the

highest bidder in an open market or by calling for
tenders, the highest bidder getting the necessary
import license.
2. PH may give the required license on the basis of
first come first served, each importer being
permitted to import watches up to a specified
amount, all such import licenses given to the one
or more importer among the traditional importers
of watches totaling 2.5 M euros

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Methods of Fixing Import

Quota
3. PH may limit import of Swiss watches by

making available to importers foreign

currency that is just enough to import
Swiss watches of the total value of 2.5 M
euros.
4. PH agency as for example the state
trading corporation may be given the
required license to import Swiss watches
of the total value of 2.5 M euros per year.

Objectives

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To provide protection and help

development of domestic industry by
restraining imports and thus restricting
foreign competition.
. To influence pattern of living of people
especially of the elite classes in
developing countries by reducing
imports of luxury and semi-luxury
goods and services.

Goals

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Reduce imports and increase

domestic production of a good,
service or activity.
. As the quantity of importing the
good is restricted, the price of the
imported good increases, thus
encourages consumers to purchase
more domestic products.

Goals

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Reduce imports and increase

domestic production of a good,
service or activity.
. As the quantity of importing the
good is restricted, the price of the
imported good increases, thus
encourages consumers to purchase
more domestic products.

Goals

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To protect domestic production

by restricting foreign competition.
. In general, a quota is simply a
legal quantity restriction placed on
an imported good that is imposed
by the domestic government .

Bilateral Quota
Agreement

Under this system, a country

can negotiate with each
country separately and fix
import quotas .

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Unilateral Quota Fixation

Under this system, import
quota of a particular
commodity from a particular
country is fixed by law or
decree by the importing
country without any
negotiation or agreement with
the other or countries.

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Unilateral Quota Fixation

These unilaterally fixed import quotas

may be broadly of two types.
o Global Quota system the full amount
of the fixed quota may be imported by
the quota fixing country from any one
country. Set number of products a
nation will import from all countries.
o Allocated Quota System the full
amount of the quota fixed is allocated or
distributed among several countries.

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Tariff Quota Fixation

System
Under this system a predetermined

quantity of a commodity is
permitted to be imported either
free (i.e. without paying any import
duty) or on payment of import duty
that is relatively low. But import of
the commodity beyond such a
fixed quota is charged a relatively
high import duty.

Mixing Quota System

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Under this system the quota fixing

country insists that domestic
producer of a certain specified
commodity use imported raw
material in a certain fixed
proportion along with
domestically produced raw
material while producing the
commodity

Effects of Import Quota

Fixation
Domestic Employment:

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Decreasing imports and increasing

domestic production also increases domestic
employment
Infant Industry:
If foreign imports compete with a
relatively young domestic industry that is
neither mature enough nor large enough to
benefit from economies of scale, then import
quotas protect the infant industry while it
matures and develops.

Effects of Import Quota

Fixation
National Security:

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Import quotas can also discourage

imports and encourage domestic production
of goods that are deemed critical to the
security of the national economy
Corruption:
Import quotas can lead to
administrative corruption in countries with
import quotas as the importers chosen to
meet the quota are the ones who can
provide the most favors to the officers.

Effects of Import Quota

Fixation
Smuggling:

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Import quotas are more likely to cause

smuggling. Its likely that people will try to
sneak the goods into the country illegally if
the import quota is only a small fraction of
the demand for the product. So
governments have to set the import quota at
a reasonable level.
Price effect:
The price of imported commodity is
comparatively high.

Effects of Import Quota

Fixation
Redistributive Effect:

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Higher profits for the domestic

sellers and domestic manufactures. This
fixation of import quota may make
consumers lose and their loss becomes
the gains of domestic producers.
Consumption effect:
The consumption of imported
goods comparatively low, because of the
high price for the product.

Import Quota and Tariffs: A

Comparison

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The policy of import quota fixation

brings speedier and also definite
quantitative results but tariff fixation is
slower and it takes time to determine
import duty.
Import quota fixation has direct and
immediate effect on the quantity of
import of the concerned commodity.
Tariff policy does not directly control
the quantity of the imported commodity.

Import Quota and Tariffs: A

Comparison

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Import quota is generally fixed by an

executive decree of the government.
Tariff duty is imposed after passing due
legislation which is debated in the
legislature.
Quota fixation is not based on any
single scientific principle and can,
therefore, be highly discriminatory,
political factor playing a notable role in
such discrimination.

Import Quota and Tariffs: A

Comparison

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In the case of tariff, there is less scope

for discrimination from country to
country. It generally operates on the
general plane and with
discrimination.
Imposition of an import duty benefits
the government as it brings revenue.
Gains of import quota would go to
the license holder in the country.

CONCLUSION
It may be concluded that
whether the government
should adopt the policy of
import quota fixation or
imposing import duty will
depend upon a number of
factors operating in the
country.

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