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What is a Quota?

Robinhood LearnJune 19, 2020
Democratize finance for all. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.
definition

A quota is a limit placed on the amount or value of a good that a country imports or exports for a given period.

🤔 Understanding quotas

When a government wants to protect domestic businesses or wants to limit a foreign power from controlling too much of its market for a good or service, it can place a quota on imports from that country. The quota can limit either the total value of the good or the number of units of the good that the nation can export to your country. Quotas can also limit domestic businesses’ ability to ship products to other countries. Quotas are different from tariffs, which tax imports and exports. Instead, they place a hard limit on imports and exports and are often used alongside tariffs.

example

Suppose a small country decides that it wants to encourage local businesses to start manufacturing paper goods. Currently, the country imports the majority of its paper goods, and consumers can buy them at a low price. The government places a quota on the import of paper goods, limiting their availability and indirectly increasing their cost. Local businesses respond by expanding into the production of paper, taking advantage of the higher prices and the resulting opportunity for profit.

Takeaway

A quota is like the roof of a silo…

When a farmer puts grain in a silo, they can keep adding more and more grain, up to a point. Eventually, there is no more space in the silo because the grain is stacked up to the roof. Quotas are similar. Without them, foreign companies can import goods to another market without volume limits. Placing a quota on imports is like putting a ceiling on the silo. They can import until they hit the limit — when there stops being room to import more.

Tell me more...

What is a quota?
What are some examples of quotas?
How do import quotas work?
Who benefits from a quota?
What are the effects of quotas?
Are import quotas good or bad?

What is a quota?

A quota is a type of trade restriction where a government imposes a limit on the number or the value of a product that another country can import. For example, a government may place a quota limiting a neighboring nation to importing no more than 10 tons of grain. The government could also structure the quota to allow the import of up to $20 billion worth of grain.

Another type of quota is the tariff quota. Tariff quotas give preferential treatment to a certain quantity of imported goods. For example, a government may agree to allow the import of up to 10 tons of grain taxed at 5% tax. Each ton of grain after the 10th incurs a 10% tax. While there is no hard limit on the amount of a product that another nation may import, the cost of the tariffs increases once they reach the quota.

Quotas can apply to all countries equally or only to certain countries. For example, a government might be willing to import 10 tons of grain from each of its neighbors, so it establishes a separate quota for each.

What are some examples of quotas?

The United States does not currently have any absolute quotas, but it has many tariff quotas that increase tariffs on a good once its import quota is met.

Some items under a tariff rate quota in the United States include tuna, olives, and ethyl alcohol. There are also tariff quotas applied to imports from specific countries. For example, the U.S. limits imports of Australian beef, Bahraini tobacco, and Dominican peanuts.

During the Great Depression, many countries used import quotas to restrict trade and protect domestic businesses. The League of Nations estimated that some countries, such as France and Switzerland, imposed tariff quotas on more than half of the goods imported during the Great Depression.

How do import quotas work?

Import quotas work by limiting the number or value of a product that a country imports (brings into a country). Quotas can apply to all exporters equally, or exporters can each have their allowance that they can fill.

Quotas can be hard for the imposing country to manage because they require adequate import controls and proper record-keeping.

When a country wants to export goods to the nation imposing a quota, it ships the goods as usual. When the products arrive, local customs look over the shipment to determine what products are being imported. In the United States, Customs and Border Patrol handles most of the administration of quotas and the checking of imports.

When a good arrives at a port or other entry to the country, customs checks the shipment and notes the number of units included and the total value. If the goods are under a tariff quota, it applies the tariff rate based on whether the imports have met the quota or not. For an absolute quota, customs either allows or blocks the import of the good.

If a country tries to import a good after it meets the absolute quota for that good, it has a few options. One option is to return the shipment to the sender. It can also store the product in a licensed warehouse until the next quota period starts. Once the new period begins, it can import the items. Finally, it can agree to have the shipment destroyed under the supervision of customs.

Who benefits from a quota?

The idea of a quota is to protect domestic businesses from foreign competition. If firms in another country can produce a product at a lower cost or with higher quality than local firms, it can be difficult for the local companies to handle the foreign competition. Limiting the amount of a product that a country can import typically increases the product’s price, offering more incentive for local businesses to produce that good.

This means that the primary beneficiary of import quotas are domestic businesses. They could sell more units of a product at a higher price than they would be able to if no restrictions were in place.

The groups that feel adverse effects from quotas are exporters and consumers.

Quotas harm exporters because they limit the amount of goods that the exporter can sell in a country. With an absolute allowance, there is a hard limit on the number of products the exporter can sell, so it must accept lower profits or raise its prices to be able to earn the same amount. If domestic businesses enter the industry, exporters also have to face competition from these new businesses.

Consumers also tend to feel the adverse effects of quotas because quotas tend to increase the cost of goods and services. Absolute quotas limit the supply of a product, which typically drives up prices. Tariff quotas add additional costs to the production and sale of the goods, forcing exporters to raise their rates.

Quotas can also force consumers to settle for lower quality goods because exporters cannot sell their higher quality products or must raise the prices of those high-quality items.

What are the effects of quotas?

One of the most significant effects of quotas is raising prices for a product. Absolute quotas create a limit on the supply of an item. If demand remains the same, decreased supply tends to lead to increased costs for consumers. Tariff quotas add additional costs to products, forcing businesses to raise prices.

Quotas can also reduce the average quality of a product in a country. If foreign companies have succeeded in a market because of their high-quality goods, quotas limit the ability of those businesses to sell that product. Domestic companies who enter the market may not have the experience or knowledge to produce products of similar quality, forcing consumers to settle for a worse option.

Foreign nations often feel the impact of quotas if they export the goods under a quota. Their businesses won’t be able to make as many sales, reducing their tax revenues.

Are import quotas good or bad?

Import quotas are a tool that governments can use. They aren’t inherently good or bad, and whether their effects are good or bad mostly depends on your point of view.

Governments frequently use quotas to protect domestic producers. Some people view this as a good thing because it helps protect jobs and give local entrepreneurs more opportunities to start businesses. At the same time, others might think that the benefits of free trade, such as lower prices for consumers and higher quality products, outweigh the benefits of protectionism.

Governments can also use quotas as part of international trade wars, where they use economic sanctions to influence other nations’ behavior. People who agree with their government’s goals will probably see quotas as a good thing in this scenario. Those who disagree with the government will likely view the allowances as a bad thing.

Even people who favor protectionism can be split on whether quotas are good or bad. Quotas require more effort to track and administer than a simple tariff, adding costs and complications to the process. People might argue that a simple tax is the better solution, while others think that the nuance that quotas allow is preferable.

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