Question

What are 2 reasons for using quotas over tariffs?  Explain 3 types of tariffs (nominal tariff, effective tariff rate, tariff-rate quota).   Explain.

Answer 1

Tariffs and quotas are both ways for governments to protect domestic firms and industries. Both of these economic trade tactics ultimately lead to higher prices of goods and fewer choices or quantity of imported goods for the consumer. Because of higher prices, consumers ultimately can buy fewer goods and services.

2 reasons for using quotas over tariffs:

• The effects of tariffs are more transparent than quotas and hence are a preferred form of protection in the GATT/WTO agreement.
• A quota is more protective of the domestic import-competing industry in the face of import volume increases.

Types of tariffs:

Nominal tariff rate is the rate associated with duties imposed on goods that do not reflect price changes of the goods due to inflation, taxes, etc.

Effective tariff rate and nominal tariff are the same.

A tariff-rate quota (TRQ) is a two-tiered tariff regime that combines two conventional policy instruments (import quota and tariff) to regulate imports.