What Is a Quota?

A quota is a government-imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period. Countries use quotas in international trade to help regulate the volume of trade between them and other countries. Countries sometimes impose quotas on specific products to reduce imports and increase domestic production. In theory, quotas boost domestic production by restricting foreign competition. Government programs that implement quotas are often referred to as protectionism policies. Additionally, governments can enact these policies if they have concerns over the quality or safety of products arriving from other countries.

In business, a quota can refer to a sales target that a company wants a salesperson or sales team to achieve for a specific period. Sales quotas are often monthly, quarterly, and yearly. Management can also set sales quotas by region or business unit. The most common type of sales quota is based on revenue.

Key Takeaways

  • Countries use quotas in international trade to help regulate the volume of trade between them and other countries.
  • Within the United States, there are three forms of quotas: absolute, tariff-rate, and tariff-preference level.
  • Tariffs are taxes one country imposes on the goods and services imported from another country.
  • Because tariffs increase the cost of imported goods and services, they make them less attractive to domestic consumers.
  • Highly restrictive quotas coupled with high tariffs can lead to trade disputes and other problems between nations.
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Quota

How a Quota Works

Quotas are different from tariffs or customs, which place taxes on imports or exports. Governments impose both quotas and tariffs as protective measures to try to control trade between countries, but there are distinct differences between them.

Quotas focus on limiting the quantities (or, in some cases, cumulative value) of a particular good that a country imports or exports for a specific period, whereas tariffs impose specific fees on those goods. Governments design tariffs (also known as customs duties) to raise the overall cost to the producer or supplier seeking to sell products within a country. Tariffs provide a country with extra revenue and they offer protection to domestic producers by causing imported items to become more expensive.

Quotas are more effective in restricting trade than tariffs, especially if domestic demand for something is not price-sensitive. Quotas may be more disruptive to international trade than tariffs. Applied selectively to various countries, they can be utilized as a coercive economic weapon.

Quotas are a type of nontariff barrier governments enact to restrict trade. Other kinds of trade barriers include embargoes, levies, and sanctions.

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, oversees the regulation of international trade, collecting customs and enforcing U.S. trade regulations. Within the United States, the three forms of quotas are absolute, tariff-rate, and tariff-preference level:

  1. An absolute quota provides a definitive restriction on the quantity of a particular good that may be imported into the United States, although this level of restriction is not always in use. Under an absolute quota, once the quantity permitted by the quota is filled, merchandise subject to the quota must be held in a bonded warehouse or entered into a foreign trade zone until the opening of the next quota period.
  2. Tariff-rate quotas allow a country to import a certain quantity of a particular good at a reduced duty rate. Once the tariff-rate quota is met, all subsequently imported goods are charged at a higher rate.
  3. A separate set of negotiations create tariff-preference levels, 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. These eligible commodities include, but are not limited to, milk and cream, cotton fabric, blended syrups, Canadian cheese, cocoa powder, infant formula, peanuts, sugar, and tobacco.

Real World Example

Highly restrictive quotas coupled with high tariffs can lead to trade disputes, trade wars, and other problems between nations. For example, in Jan. 2018, President Trump imposed 30% tariffs on imported solar panels from China. This move signaled a more aggressive approach toward China's political and economic stance. It was also a blow for the U.S. solar industry, which was responsible for generating $18.7 billion of investment in the American economy and which at the time imported 80% to 90% of its solar panel products.