Understanding How The Import Quota Functions In Businesses

In today’s global economy, products from all over the world are accessible to everyone. This is made possible because of International Trade. Import facilitates ease of doing business by catering to the needs of resources that are not available in the country or are available cheaper overseas. It also offers various choices to consumers. However, the government imposes certain trade restrictions, including the “Import quota”. 

Did you know? Import Quota is a limitation imposed by the government on the products imported from various countries within a specified period of time.

What is an Import Quota?

An import quota is a trade restriction that limits the quantity of goods imported into a country in a given period. The restriction can either be quantity-based or value-based. It is a form of protectionism that the government uses to prevent the dumping of foreign goods into the country, which may affect domestic businesses.

Often developing countries impose protection measures such as import quotas or tariffs to protect domestic industries from cheaper foreign alternatives. For example, the Indian government has fixed an import quota of 2.5 lakh tonnes of urad and one lakh tonnes of tur annually from Myanmar.

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Objectives of Import Quota

Countries need quotas in international trade that help regulate the volume of trade between them and other countries. Following are some of the objectives of Import Quota:

1. Balance of trade

Balance of trade refers to the difference between a country’s imports and exports over a specific period. Governments often impose import quotas to maintain a positive balance of trade. This helps to reduce the trade deficit by increasing exports and reducing imports.

2. Protect the domestic market

Many imported goods are found to be a cheaper alternative to domestic goods, decreasing domestic business market share. Hence to support domestic businesses from foreign competition, import quotas are levied. 

3. Stabilise Internal price

An import quota is also used to stabilize the price levels in a country by regulating the import of goods.

4. Conservation of Foreign exchange

Increased imports lead to the outflow of foreign exchange. Thus to conserve foreign exchange and use it for essential goods, governments use import quotas as a tool for the reduction of import of luxury goods.

5. Retaliation

When foreign countries impose various trade restrictions, import quota is used as a measure of retaliation against them.

Difference between Import Quota and Import Tariff

Import quotas limit the amount of a good that can be imported, and it is used primarily for protectionism, on the other hand, import tariffs is mainly for revenue generation and protectionism by making imported goods more expensive.Tariff is the price at the cost of products imported from any other nation. There are also other difference in between both as listed below:

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Effect of Import Quota

The import quota may be fixed either in terms of quantity or the value of the product. Following list are some of the effects of import quota:

1. Price Effect

Import quota places a limit on supply thereby increasing the price of the product. This is based on the Law of Demand and Supply.

2. Production Effect

Since the import quota limits the import, this leads to an increase in the domestic production of goods to meet the demand. 

3. Consumption Effect

When the price of a commodity increases, it reduces the purchasing power of the consumer. Thus import quota reduces the consumption of the product.

4. Revenue Effect

The revenue effect of an import quota depends on the specific circumstances of the market in which it is implemented. This effect is captured by either domestic importers or foreign exporters or shared by both.

5. Redistributive Effect

The increase in price leads to a gain for the domestic producer and a loss for the consumer. This is called the redistributive effect.

How does Import Quota work?

The government of each country regularly monitors the level of imports and exports. It imposes import quotas whenever necessary for various reasons, as discussed above. Based on the law of demand and supply, when import quota limits a product's supply, it increases its price. This tends to shift the supply curve towards the left. It creates a new equilibrium quantity replacing the natural equilibrium, which would have been there without a quota. 

Types of Import Quota

Quota affects the allocation of welfare and the costs that the quota imposes on different societal groups.

1. The Tariff Quota

In this system, goods are allowed to be imported duty-free or at a lower rate of duty till it reaches a fixed limit. Once the import crosses the limit, a higher duty rate is charged. It is a combination of both tariffs and quotas.

This system is more flexible yet achieves its goal of restricting imports. The restriction is relatively less as some goods are allowed to be imported duty-free or at a lower rate. However, this also comes out as a drawback because imports tend to be higher at the beginning until it reaches the limit, leading to domestic price fluctuations.

2. The Unilateral Quota

In this system, a country places a fixed limit on the import of a commodity during a specified period. It is imposed without any prior negotiations or agreements with foreign countries. The quota can either be fixed on a global level or allocated to different countries. 

The global quota helps improve the importing country's bargaining power, wherein exporters compete to capture the market. This provides more favourable terms to the importers. However, small countries find it harder to compete and get a quota in this system.

The allocated quota system encourages even small countries to export by giving them a fixed quota. However, this sometimes leads to inferior quality and relatively high costs for the importers. It may also lead to a monopoly. This system also creates doubt of discrimination between countries based on the quota allocated.

3. The Bilateral Quota

In this type, the importing and exporting countries negotiate with each other and fix the quota by mutual agreement. This quota helps maintain good trade relations with foreign countries and prevents retaliation.

One of the benefits of this system is it prevents monopoly and removes the doubt of discrimination. But at the same time, it seems to encourage the formation of international cartels.

4. Import Licensing

This mechanism is used to regulate and administer imports. Under this system, prospective importers must obtain a license from the government to import specific products within the quota. The government issues licenses only to established importers, thereby preventing speculation.

Also Read: Importance of Value Chain: Concept, Types and Examples

Advantages of Import Quota

To afford protection to domestic industries through restricting foreign competition by limiting the imports from abroad. The following are some of the advantages: 

• It acts as a support mechanism for domestic businesses 
• Quota is a popular form of trade restriction as it is more flexible and easy to impose.
• It helps in increasing the GDP of the country as it increases net exports.

Disadvantages of Import Quota

Import quotas are limits on the amount of a particular good that can be imported into a country. These quotas are used as a trade restriction, designed to protect domestic industries from foreign competition and to promote domestic production. There are a few disadvantages to import quota that are as follows:

• It restricts the choices available to consumers and forces them to pay a higher price.
• It may lead to corruption as the officer-in-charge of quota allocation may be exposed to bribery.
• It affects trade relations with foreign countries.

Conclusion

In today’s era of globalization, where International trade has become inevitable, trade barriers have also become unavoidable to protect the interests of domestic businesses. An import quota is one such trade barrier. Import quotas are government-imposed limits on the quantity of a certain good imported into a country. These quotas set an absolute limit on the number of certain goods that can be imported into a country.

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