Question

Consider a small country applying a tariff t as we did in class. Instead of a tariff on all units imported, however, we will suppose that the tariff applies only to imports in excess of some quota amount M’ (which is less than the total imports). This is called a “tariff-rate quota” (TRQ) and is commonly used on agricultural goods.

b. Consider the possibilities of who will receive quota rents that we talked about in class. Based on who receives the rents, how does the use of a TRQ rather than a tariff at the same rate affect Home and Foreign welfare?

c. Based on your answer to (b), why do you think Foreign firms may be more willing to accept a TRQ instead of a tariff?

Answer 1

a)

Quotas can be allocated in several ways:

1. The Government can auction the quota rights in an efficient market to anyone willing to bid, thus, the revenues from the auction would increase home welfare and acts like a specific tariff.

2. The government could give away the quota rights to someone in the importing economy which means that the benefits would remain in the domestic economy as the quota rents accrue to whomever receives these rights. Home welfare would increase.

3. The government could give away the quota rights to foreigners (or the exporters) thus, then people in the foreign country receive the quota rents. This would increase foreign welfare via VER agreements (Voluntary Export Restraint).

b) VER agreements are usually why foreign (exporting) countries were ready in the past to accept apparently discriminatory restrictions on their exports. This agreement is entered into between importers and exporters. Whenever an import quota is used, it requires the use of either import or export licences. In case of export licenses, this ensures that, indeed, the exporter benefits from the quota rents which increases foreign welfare as the exporting country, finds that it is able to charge a higher price on a smaller export quantity. This is why foreign firms are more open to tariff quotas rather than tariffs.