If a company wishes to export 5,000 shoes to a nation with strict trade policies, the government may impose a tariff or a quota on the business. Though both of these trade limitations inhibit the free flow of goods and services between borders, these restrictions are fundamentally different.
A tariff is a tax imposed on an imported good. In some cases, the taxes are so exorbitant that no buyer wishes to import them overseas, and the buyer must seek local vendors to supply the item instead. James D. Gwartney, author of “Economics: Public and Private Choice,” states that the average tariff on goods imported to the United States in 1930 was a whopping 60 percent. In 2011, however, the figure is closer to 4.5 percent.
An import quota restricts the quantity of goods entering the country. The government decides which businesses can sell products by issuing licenses. These certificates specify the number of units permissible for sale to a vendor within the nation. In countries plagued by corruption, the issuance of licenses is sometimes subject to firms offering the highest bid. Other times, a lottery system determines which businesses receive the license. Robert Carbaugh cites in his textbook "International Economics" examples of goods subject to import quotas in the United States. The products include evaporated milk from the Netherlands, blue-mold cheese form Chile and Swiss cheese from Romania.
Governments impose tariffs and quotas for similar reasons. In both cases, these restrictions compel businesses to buy from local sources. These trade mechanisms are designed to protect domestic industries from competition abroad. The industries that receive protection through the imposition of tariffs tend to have strong political lobbies -- auto and steel are two examples. The government also gains revenue from the tax imposed from tariffs and the sale of licenses from import quotas. A consequence of tariffs and quotas, however, is consumers paying higher prices and creating dead-weight loss, or wasted money. University of Michigan economics professor Alan Deodorff argues the net losses of these restrictions exceed the benefits to the government and domestic producers.
Use alliteration to remember the difference between a tariff and an import quota: Equate tariff with “tax” and quota with “quantity.” Additionally, think of concrete examples to associate with a tariff and a quota. In the example of a tariff, continue with the "T" alliteration and picture tobacco, a commodity that is heavily taxed in the United States.
Since 2008 Catherine Capozzi has been writing business, finance and economics-related articles from her home in the sunny state of Arizona. She is pursuing a Bachelor of Science in economics from the W.P. Carey School of Business at Arizona State University, which has given her a love of spreadsheets and corporate life.