Page 102 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes Import quotas can be of different types. First of all, there can be unilateral quotas which can be global or
allocated. In case of global quotas, quota is fixed in global terms and any foreign country can supply
the amount fixed by quota at the lowest price. The quota imposing country gets the price advantage
and the goal quotas are non-discriminatory. The allocated quotas, however, involve allocating and
distributing the quota among different foreign countries on the basis of a pre-determined criterion.
The allocated quotas are discriminatory; and the quota imposing country does not necessarily get the
price advantage of the global quota system. Then there can be bilateral quotas as opposed to unilateral
quotas. Bilateral quotas imply mutual agreement between countries through negotiation. The
advantage of these quotas is that they do not provoke retaliation. Finally, there are what are called as
mixing or indirect quotas, in whose case the domestic producers are asked to use a fixed proportion
of imported and local materials used in producing their products. The quota is fixed not in absolute
terms but in percentage terms.
Let us now come to the question of import quotas versus import duties and see their differences and
similarities. Until the appearance of new contributions in the late 1960s and early 1970s, particularly
made by Bhagwati and Corden, it was thought that quotas and duties were hardly distinguishable
by their effects. The more recent studies have, however, shown there is no strict equivalence between
the two.
There are certain similarities between the quotas and the duties
(a) they both have the same objectives, viz. to reduce the level of imports so as to protect domestic
industries, correct balance of payments deficits, expand domestic employment and economic
activities. While their objectives are the same, their methods are different. A tariff acts directly
on the price and indirectly on the quantity of the imported goods. A quota acts directly on the
quantity of imports and has an indirect effect on the price of the imported goods.
(b) A tariff of a certain height cuts imports to a certain quantity—it has, therefore, a quota equivalent.
A quota would limit imports to a certain quantity and therefore, raises the import price—it has,
thus, a tariff equivalent, and
(c) Since both quotas and tariffs raise the import price and reduce the import quantity they produce
similar effects on consumption, production, trade balance, terms of trade, national income,
redistribution, factor movements, economic growth and economic welfare.
The important differences between quotas and tariffs would be as follows :
(a) Tariffs bring revenues to the government whereas quotas do not. This raises certain redistribution
and welfare issues. Under tariffs, a part of consumers’ loss goes to the government by way of
tariff revenue. Under the quota system the extent of consumers’ loss will be more or less the
same, but to whom that surplus goes is ambiguous. It could go to the government if the
government charged a fee for selling import licences. In that case, the import licence fee, will be
an equivalent of an import tariff. If, however, the quotas are distributed freely to the importers
without charging a fee, then importer’s surplus will increase at the cost of government revenue
or consumer’s welfare loss. Furthermore, tariff revenue can be used for social expenditure; but
the quota profits, going to the importers, may not contribute to net social welfare.
(b) Distribution of import licences (associated with quotas) may give rise to corruption and bribery
on the part of government officials. Import tariffs do not create such evils of government
corruption, political favoritism, nepotism, etc.
(c) Quotas could be more effective than tariffs particularly when the domestic demand and supply
curves for the import good are inelastic. See Figure 8.1.
If, as in the Figure 8.1, the demand and supply curves are inelastic, tariffs will fail to reduce
import quantities. From the free trade price P the tariffs have raised the price to a substantially
p
higher level, P , and yet the quantity imported has not been cut down by tariffs. Tariffs have, of
t
course, resulted in substantial government revenues, but they have failed to generate protective

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