The Effects of Import Quotas

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Import quotas refer to limitations on the amount of a specific good a country can import. Import quotas are divided into absolute quotas, in which the country cannot import anything over a specific limit, and tariff-rate quotas, in which the country can import over the limit, but pay much higher tariffs. Governments use quotas to help domestic production survive the fierce international competition, but, in practice, the effects are much more diverse.

Rising Prices

Suppose you have sugar imported freely in a country and accounting for 50 percent of the total sugar market. If the government imposes a quota on sugar imports, then the total sugar supply in the market will drop. The excess demand will drive prices up, giving a blow to consumers' purchasing power. Unless domestic production manages to cover demand, then the sugar price can remain high indefinitely.

Boost of Domestic Production

Domestic production has to cover the gap in the market foreign products used to occupy. When quotas decrease the import of sugar from, say, 5 lb. per person to 2 lb., then domestic sugar producers have to increase their work rate and provide those 3 lb. to consumers. This fact is especially helpful for domestic industries lacking not the capabilities, but the incentive -- due to competition with cheaper foreign products -- to produce and subsequently earn more.

Effects on Multinational Corporations

Import quotas have a direct negative effect on multinational corporations. Such enterprises, such as Nike and General Motors, place emphasis on international trade, as domestic consumption cannot cover their high targets. For example, in 2008, out of the approximately 7 million total vehicle sales of General Motors, only approximately 3 million was in the U.S. In the event of an import quota by a major buyer, multinational corporations must quickly find alternative markets or cut down production, along with subsequent profits.

Promoting Wrong Economic Orientation

The main goal of import quotas is to protect an industry that in the free market is doomed to fail against international giants. Therefore, such measures are like putting hobbling industries on life support. However, this way governments emphasize evidently weak industries instead of supporting sectors where domestic producers can thrive. For example, the United States cannot compete with China in clothes production, but it can focus on keeping the upper hand in the computer software industry.