Question

What is Quota ? and which one is better for business Quotas or tariffs?

Answer 1

In simple words, Quota is a limit on quantity. In Internationa Trade, Quotas are the maximum limits on the quantity or the amount of goods and services that can be exported or imported set up by the government of a country. On the other hand, tariff is a one such trade barrier that is most often used in the trade agreements between the countries. This can be explained as the tax imposed on the goods and services from other countries to home country. It is like an advalorem tax, that increases the prices of the imported goods and provides revenue to the government of the home country.

Considering the net welfare effects of both trade barriers, it can't be said which trade barrier is better as both have more or less similiar impacts. But, tariff is one such barrier that increases the price of the goods and thus domestic producer produces more and utimate burden of tax is shifted to households, which in turn increases the government revenues. For business, trade barrier Quotas are more successful in reducing foreign competition, as it limits the maximum quantity of goods that can be imported. In contrast, tariffs also reduces the foreign competition by imposing taxes which increases the prices, but for consumers who are willing to pay higher prices, tariffs do not play significant role in rectricting trade volume as compared to the role payed by quotas.

The idea behind imposing these trade barriers is nothing but to protect domestic infant industries, small scale industries, inefficient businesses etc from the foreign competitive products. Both the tariffs and quotas have their role in limiting the foriegn competition, but tariff is one such practice which is adopted by most of the countries and to some extent allowed by WTO. However, it has its own implications as this can lead to trade wars between countries ( for eg. China and US).