The Disadvantages of Tarrifs & Quotas

by Monica Sanders, Demand Media
Tariffs and quotas are tools meant to protect domestic industries.

Tariffs and quotas are tools meant to protect domestic industries.

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One of the most debated issues in international trade is protectionism. On one hand, nations believe a certain amount is necessary to protect domestic industries and jobs. On the other, protectionism may invite retaliation from trading partners, foster additional protectionism and result in blocks to free trade. Two commonly used protectionist tools are tariffs and quotas.

Tariffs and Quotas Defined

A tariff is essentially a tax. It raises the price of an imported good, making it more expensive than similar domestic goods. The idea is to increase demand for domestic products while reducing the volume of imports. Tariffs also provide a source of revenue for the country levying them. A quota is a limit on volume of imported products. Depending on the country, this limit may be expressed as a percentage of sales of certain products or a limit on the number of units sold. Some parts of the textile sector are protected by quotas in the United States.

Quota Impacts and Disadvantages

Quotas are usually employed to protect infant industries and keep market entry costs low for domestic producers. Often the quotas last long after the industry has matured. Other uses for quotas are to protect strategic industries such as defense and agriculture. In market environments where imports are on the rise, quotas are more protective than tariffs. When one country uses quotas, its trading partners do the same and cite the same reasons. The end result is less exporting opportunity for all producers and higher prices for all consumers. Quotas are also cumbersome for the country using them. They require a lot of paperwork indicating exact amounts of products for each country facing a quota. It is also difficult to measure the precise degree of protection quotas offer.

Tariff Impacts and Disadvantages

Tariffs raise the price of imports. This impacts consumers in the country applying the tariff in the form of costlier imports. When trading partners retaliate with their own tariffs, it raises the cost of doing business for exporting industries. Some analyst believe that tariffs cause a decrease in product quality. Businesses look for ways to cut production costs to account for tariffs. Tariffs are more transparent and easier to administer than quotas. This makes it easier for trading partners to negotiate them down or eliminate them.

Other Problems with Tariffs and Quotas

High tariffs and quotas can result in trade wars between nations. The European Union and China were involved in a trade dispute over textiles that delayed an agreement that expired in 2005. The United States' high tariffs on auto parts are said to be a sticking point in a number of trade agreement negotiations. These disagreements hurt the incomes of each country involved in the disputes. Trade only works when countries import and export.

About the Author

Monica Sanders has been a writer for more than 10 years, seven of which were in television and online journalism. She holds a Bachelor of Science, Juris Doctor and Master of Laws and has published articles and columns ranging in subject from legal and international business issues to personal finance.

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