Tariffs and
quotas are sometimes imposed to “protect” domestic industry from international
competition. The effect of a tariff is similar to any other unit tax: The
supply curve price at all quantities is raised by the amount of the tax.
From an
economic viewpoint, the protection of domestic industry through tariffs and
quotas is a poor notion. The resources used to produce goods domestically must
be drawn from other industries, so domestic production is no better than it
was. At the same time, the country against which the tariff was imposed will
now have less of our currency to trade back to us for our goods. Everyone
eventually suffers by paying more for both domestically produced and imported
goods, and total world production is reduced. In the short term, workers in the
“protected” industry benefit because they do not have to be retrained. But the
rest of society is subsidizing these workers at many times their
wages/salaries. It would be cheaper to pay them not to work.
A quota is a
somewhat different situation. In this case, there is no tax revenue for the
government. The supply and demand curves do not change. However, the quantity
exchanged is forced to a point below equilibrium. (If this were not the case,
there would be no reason to impose the quota.) As a result, trade occurs at a
quantity where the price at which suppliers are willing to sell is
substantially lower than the price at which purchasers are willing to buy.
Importers make out like bandits because they can buy at the low “supply” price
and sell at the high “demand” price. Some method will have to be found to
allocate the quote between different importers.
If an
importer can negotiate an exclusive agreement to supply the domestic market
with the entire quota of goods shipped from the foreign producer, then a
question of economic rent arises. If the best use of the goods is to export up
to the amount of the quota, then the next best use is to sell the goods locally
in the country of origin. The amount by which the demand price exceeds the
supply price, times the quantity of the quota, is the economic rent of the
goods. The importer and the supplier will have to negotiate who gets what
percentage of this amount.
From a
consumer point of view there is no difference between a tariff and a quota so
long as they result in the same final price. The main difference is that under
a tariff, the government gets all the extra money; but under a quota, the money
will wind up in a combination of the foreign manufacturer, an import business,
and perhaps the government if it insitutes some sort of program like selling
quota allocations to importers for a fee.