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What is a 'Quota'

A quota is a government-imposed trade restriction that limits the number, or monetary value, of goods that can be imported or exported during a particular time period. Quotas are used in international trade to help regulate the volume of trade between countries. They are sometimes imposed on specific goods to reduce imports, thereby increasing domestic production. In theory, this helps protect domestic production by restricting foreign competition.

BREAKING DOWN 'Quota'

Quotas are different than tariffs, or customs, which place a tax on imports or exports in and out of a country. Both quotas and tariffs are protective measures imposed by governments to try to control trade between countries, but quotas focus on providing limits by defining the quantities of a particular good that will be accepted, while tariffs impose a specific fee on those goods seeking entry into the United States

The fees associated with tariffs are designed to raise the overall cost to the producer, or supplier, seeking to sell goods within the United States and serves as a way to encourage outside goods to be priced for higher sale prices than if the tariffs were not in place.

Import Quota Regulatory Agencies

The U.S. Customs and Border Protection Agency, a federal law enforcement agency of the U.S. Department of Homeland Security, is in charge of regulating international trade, collecting customs and enforcing U.S. trade regulations. Within the United States, there are three forms of quotas: absolute, tariff-rate and tariff preference level.

Absolute quotas provide a definitive restriction on the quantity of a particular good that may be imported into the United States, though this level of restriction is not always in use. Tariff-rate quotas allow a certain quantity of a particular good to be brought into the country at a reduced rate of duty. Once the tariff-rate quota is met, all subsequent goods brought in will be charged at a higher rate of duty. Tariff preference levels are created through separate negotiations, such as those established through Free Trade Agreements (FTAs).

Goods Subject to Tariff-Rate Quotas

Various commodities are subject to tariff-rate quotas when entering the United States. This includes, but is not limited to, milk and cream, brooms, cotton shirting fabric, blended syrups, Canadian cheese, cocoa powder, infant formula, peanuts, sugar and tobacco.

Risks Associated With Quotas and Tariffs

Highly restrictive quotas coupled with high tariffs can lead to trade disputes between nations. For example, in 2014, the United States was in a trade dispute with China over Chinese silicon solar panels being imported into the United States in order to bring the prices of these solar panels up, and make the prices of products produced in other countries more competitive in the marketplace, tariff increases on the Chinese solar panels of 19% to 35% were proposed. This was met with resistance from Chinese companies, as it would increase the costs associated with bringing the product to the United States.

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