Import Tariffs and Quotas
Import Tariffs
- A tariff is a tax placed on imported goods from other countries
- E.g. Tennis rackets imported into the UK from China have a tariff of 4.7%
- E.g. Tennis rackets imported into the UK from China have a tariff of 4.7%
- A tariff increases the price of imported goods, which helps shift demand for that product or service from foreign businesses to domestic businesses
When the USA places a tariff on imported cheese from Britain, the price of British cheese in the USA rises
- American customers are more likely to purchase American cheese now that the tariff has made British cheese more expensive
The benefits of tariffs
- They protect infant industries so they can eventually become more competitive globally
- An increase in government tax revenue
- Reduces dumping by foreign businesses as they cannot sell below the market price
The disadvantages of tariffs
- Increases the cost of imported raw materials, which may affect businesses that use these goods for production, leading to higher prices for consumers
- Reduces competition for domestic firms, who may become more inefficient and produce poor-quality products for their customers
- Reduces consumer choice as imports are now more expensive and some customers will be unable to afford them
Exam Tip
Students are often confused about who pays the tariff. It is not the foreign company, but the domestic company who pays the tariff. In our cheese example above, any retailers in the USA who import cheese from Britain have to pay the tariff (import tax) when it crosses the border into the USA. This policy may help cheese manufacturers in the USA but it harms any other business that imports and sells foreign cheese as it raises their costs of production.
Quotas
- An import quota is a government-imposed limit on the amount of a particular product allowed into the country
- E.g. China has set an import quota on Cambodian rice of approximately 5.32 million tonnes per year
- E.g. China has set an import quota on Cambodian rice of approximately 5.32 million tonnes per year
- Restricting the physical quantity of imports means that domestic businesses face less competition and benefit from a higher market share
- More of the domestic demand is now met by domestic businesses
- More of the domestic demand is now met by domestic businesses
The benefits of import quotas
- To meet extra demand, domestic businesses may need to hire more workers, which reduces unemployment and benefits the wider economy
- The higher prices for the product may encourage new businesses to start up in the industry
- Countries are able to easily change import quota as market conditions change
- Foreign countries view quotas as less confrontational to their business interests than tariffs
- Their exporters can still sell their goods at a higher price in domestic markets (but a limited amount of it)
- Their exporters can still sell their goods at a higher price in domestic markets (but a limited amount of it)
The disadvantages of import quotas
- Quotas limit the supply of a product and whenever supply is limited, the price of the product rises
- They may generate tension in the relationship with trading partners
- Domestic firms may become more inefficient over time as the use of quotas reduces the level of competition
