Import Quota
An import quota is a limit on the quantity of a good that may be imported during a period. Quotas are a form of non-tariff barrier to trade, and they restrict imports by quantity rather than by price.
Mechanism
A quota sets a maximum quantity that may be imported. If the quota is binding, the quantity imported equals the quota, and the domestic price rises above the world price to the level at which the quantity demanded equals the quantity supplied domestically plus the quota.
The difference between the domestic price and the world price is the quota rent, which accrues to whoever holds the right to import. The allocation of the rights determines who captures the rent, and the method of allocation affects the efficiency and the distributional effects of the quota.
Comparison with Tariffs
A tariff and a quota can have similar effects on the quantity imported and on the domestic price. The two instruments differ in their effects on the distribution of the rents and in their response to changes in market conditions.
Under a tariff, the government captures the revenue, and the quantity imported adjusts to changes in demand and supply. Under a quota, the rent goes to the holders of the quota rights, which may be foreign exporters or domestic importers, and the quantity imported is fixed regardless of changes in demand.
The quota provides more certainty about the quantity imported, which may be the objective if the concern is the volume of trade. The tariff provides more certainty about the price, and it generates revenue for the government.
Administration
Quotas are administered through several mechanisms. The rights may be allocated to domestic importers, to foreign exporters, or through an auction. The choice affects the distribution of the rent and the efficiency of the allocation.
The allocation of the rights to foreign exporters, through voluntary export restraints, transfers the rent abroad. This has been used in trade negotiations, where the exporting country agrees to limit its exports in exchange for avoiding more restrictive measures.
The allocation of the rights through an auction captures the rent for the government and allocates the rights to those who value them most. The auction is therefore more efficient than the allocation of the rights to particular firms.
Effects and Policy
The effects of a quota on welfare are similar to those of a tariff. The quota raises the domestic price, reduces imports, and creates a deadweight loss. It transfers income from domestic consumers to the holders of the quota rights and, where the rent is captured by foreign exporters, reduces national welfare further.
Quotas have been used to protect domestic industries, particularly agriculture and textiles. Their use has declined as a result of trade liberalisation, which has converted quotas into tariffs and has reduced the scope for their use.
The use of quotas raises questions about the objectives that they serve. Where the objective is to protect domestic producers, a tariff may be more transparent and more efficient. Where the objective is to limit the volume of trade, a quota may be more effective, though at a cost in terms of welfare.
Quotas and Rent Seeking
The administration of quotas creates rents, and the pursuit of these rents can divert resources from productive uses. Firms may lobby for the allocation of quota rights, and the lobbying consumes resources without creating value.
The rent-seeking behaviour is a cost of the quota that is additional to the deadweight loss. The cost depends on the method of allocation and on the value of the rents. Where the rights are allocated administratively, the scope for rent seeking is greater.
The auctioning of quota rights can reduce rent seeking, since the rights are allocated to those who value them most and the rent accrues to the government. The auction is therefore more efficient than administrative allocation, though it requires a market for the rights.
Tariffication
The reform of trade policy has involved the conversion of quotas into tariffs, a process known as tariffication. The objective is to make the protection more transparent and to reduce the distortions that quotas create.
Tariffication involves the estimation of the tariff equivalent of the quota, which is the tariff that would produce the same level of imports and the same domestic price. The estimation is difficult, since it requires information about the demand and supply conditions in the market.
The conversion of quotas into tariffs has been accompanied by the reduction of the tariffs over time, as part of trade liberalisation. The process has reduced the distortions created by quotas, though the resulting tariffs are still a source of protection.
Quantitative Restrictions and Safeguards
Quotas are used as safeguards, which are temporary restrictions imposed in response to a surge in imports that causes or threatens to cause serious injury to domestic industry. The safeguards are permitted under international trade rules, subject to conditions.
The use of safeguards is subject to disciplines, including the requirement that the measures be temporary and that they be applied on a non-discriminatory basis. The measures must be notified and are subject to review.
The use of quantitative restrictions has declined as a result of trade liberalisation, but they remain in use for particular products, including agricultural goods and textiles. The rules that govern their use are part of the framework of international trade.
Summary
Import quotas restrict trade by quantity, and their effects depend on the method of allocation of the quota rights. The administration of quotas, the process of tariffication, and the use of quantitative restrictions as safeguards are all central to the analysis of trade policy.