Page 103 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 8 : Tariff, Quotas and Non-tariff Barriers : Definitions and Types

effects. Import quotas, if called upon, will certainly do a job of restricting imports to any desirable Notes
size and thereby create all the necessary protective effects. In that sense quotas succeed where
tariffs may fail.
Price
D S

P 1

Tariffs
P 1
S D
Quantity
Figure 8.1 : Inelastic Demand and Supply Conditions Affecting Tariffs.
(d) The terms of trade effects of tariffs are determinate or predictable, but those resulting from
quotas are indeterminate or unpredictable. See the Figure 8.2 A-B.
Tariff imposition, in Figure 8.1 A, shifts the tariff-imposing country’s offer curve from OH to
OH which would result in an improvement in the country’s term of trade. This is shown by the
1
steeper, OT terms of trade line (after tariffs) as compared with the free trade terms of trade line
1
OT . In Figure 8.2 B, we show the result of quota imposition on the country’s terms of trade. The
0
quota-imposing country’s offer curve is OH and the foreign country’s offer curve is OF. Free
trade equilibrium is at Q where the terms of trade are shown by the line OT . At trade equilibrium
0
point Q, the country’s imports are OM (and exports are M Q); and the country may impose a
0 0
quota on the imports such that the imports are reduced by the quota equal to the size of OM .
1
Importable Importable
OH T 1 OH T 1 OH
1
T 0 T 0
M OP
OF 0 Q

M 1
F
E
Quota

O Exportable O Exportable

Figure 8.2 A Figure 8.2 B
Diagram 8 A-B : Terms of Trade Effect of Tariffs and Terms of Trade Effect of Quotas.

The question that now arises is what would be the country’s terms of trade as a result of fixing
the import quota at OM level. Now, draw a line from M horizontally straight, and this line
1 1
cuts foreign country’s offer curve at E and the home country’s offer curve at F. If, after the quota
imposition, trade equilibrium takes place at E, then the quota-imposing country’s (or home
country’s) terms of trade improve, because OT is steeper than OT . On the other hand, if the
1 0
new trade equilibrium takes place at F, then the country’s terms of trade would worsen as
indicated by the line OT which is less steep compared to OT . This would make the terms of
2
0
trade effects of quotas somewhat unpredictable, whereas the effects of tariffs on the country’s
terms of trade are somewhat predictable.

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