Global Economic Analysis - Tariffs and Quotas

Tariffs
Tariffs are taxes imposed on imported goods; they will increase the price of the good in the domestic market. Domestic producers benefit because they receive higher prices. The government benefits by collecting tax revenues. In the graph below, S0 and D0 represent the original supply and demand curves which intersect at (P0, Q0). St shows what the supply curve is with the introduction of the tariff. The market then clears at (Pt, Qt). Less of the good is produced, and consumers pay higher prices.

Figure 5.5: Effect of a Tariff on a Supply Curve

Quotas
Quotas are numerical limits imposed on imported goods. Consumers are harmed by quotas, while domestic and foreign producers benefit by receiving higher prices. In the graph below, the market initially clears at P0, Q0. The supply curve Sd+i0 represents the quantity supplied by both domestic and foreign producers before the imposition of the quota. D0 is the domestic demand curve. After the quota, the supply curve looks like Sd+i1. Both foreign and domestic producers receive higher prices while consumers lose out.

Figure 5.6: Effect of Quotas on the Supply Curve

Voluntary Export Restraints (VERs)
These restraints limit the quantity of goods that can be exported from the country to one or more of its trading partners. They are usually "voluntarily" negotiated so that quotas or tariffs are not imposed.

Exchange Rate Controls
Exchange rate controls set the exchange rate of a nation's currency above the market rate. This makes the nation's exports artificially expensive, which reduces the quantities of the nation's goods that foreigners are willing to buy. This means that the country's citizens have little foreign currency available to buy imported goods. With exchange rate controls, black markets usually exist where currency exchange occurs at a market rate. Exchange rate controls are declining in popularity, although some developing nations still use them.

"Hidden" Methods
Hidden methods of limiting imports include special regulations and licensing requirements that restrict imports. For instance, the Japanese government imposes special quality requirements on food to restrict food imports and protect Japanese farmers.

Trade Restrictions


Related Articles
  1. Economics

    What Is a Quota?

    In business, quota usually refers to the sales target for a salesperson or a sales team.
  2. Economics

    The Basics Of Tariffs And Trade Barriers

    Everything you need to know - from the different types of tariffs to their effects on the local economy.
  3. Economics

    Tariffs

    Tariffs, or customs duties, are taxes imposed on foreign goods and services. In addition to providing a country with additional revenue, tariffs offer protection to domestic producers. Imported ...
  4. Economics

    Macroeconomics: International Trade

    By Stephen Simpson International trade is the exchange of goods, services and capital across national borders. It is a multi-trillion dollar activity, central to the GDP of many countries, and ...
  5. Professionals

    Supply and Demand

    Supply and Demand. Focuses on price movements caused by shifts in the demand or supply curve.
  6. Professionals

    Trade Restrictions

    CFA Level 1 - Trade Restrictions. Learn how trade restrictions affect the economy. This section covers arguments favoring trade restrictions and why they are often adopted.
  7. Economics

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
  8. Economics

    Understanding Free Trade

    Free trade exists when nations can swap goods and services without the constraints of tariffs, duties or quotas.
  9. Economics

    Economics Basics: Supply and Demand

    Investopedia explains: The Law of Demand, The Law of Supply, Supply and Demand Relationship, Equilibrium, Disequilibrium, and Shifts vs. Movement
  10. Professionals

    International Finance

    CFA Level 1 - International Finance Basics. Discusses how the exchange rate influences supply and demand. Looks at the two main factors affecting the supply and demand for currency.
RELATED TERMS
  1. Quota

    A government-imposed trade restriction that limits the number, ...
  2. Tariff

    A tax imposed on imported goods and services. Tariffs are used ...
  3. Individual Transfer Quota - ITQ

    A quota, imposed on individuals or firms by a governing body, ...
  4. Multiple Column Tariff

    A tariff system where the tariff rate or import tax assessed ...
  5. Reserve Tranche

    The proportion of the required quota of currency that each International ...
  6. Activity Quota

    A minimum level of sales-oriented actions that must be met by ...
RELATED FAQS
  1. How can tariffs cause inefficiencies in domestic industries?

    Understand what a tariff is and why a government would want to impose a tariff. Learn how tariffs can contribute to domestic ... Read Answer >>
  2. How do tariffs protect domestic industries?

    Understand the four ways tariffs are used by domestic government to protect its domestic industries. Learn how tariffs are ... Read Answer >>
  3. What are common reasons for governments to implement tariffs?

    Gain a basic understanding of a government-sanctioned import tariff, what it is meant to accomplish and common reasons for ... Read Answer >>
  4. Which countries have the highest tariffs?

    Find out which countries have the most restrictive import tariffs on international products as ranked from data collected ... Read Answer >>
  5. Do financial advisors need to meet quotas?

    Learn why financial advisors who receive guaranteed salaries from their employers usually have quotas, and understand what ... Read Answer >>
  6. How is the International Monetary Fund financed?

    Understand the purpose that the International Monetary Fund (IMF) was created for, and learn how the organization obtains ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center