A country’s government has many tools at its disposal to build the strongest economy possible. Most of the time, they want to protect local businesses as it provides jobs that contribute to economic growth.
In some instances, they might achieve this at the expense of another country. Some countries employ unfair trade practices such as dumping. To protect their own country and economy, the government could put a quota on specific exported products from specific countries.
Definition
A quota is a trade restriction imposed by the government to limit the number or monetary value of goods and services that a country can import or export in a specified period of time.
Drawbacks
Having a quota on a country’s goods could be seen as a declaration of economic warfare. Depending on the relationship and aggression of related countries, it could possibly escalate into a trade war or worse.
Domestically, it also puts local businesses under pressure to produce to meet the demands of the whole country. This could push prices up as they are not specialized and reduce consumer choices. Consumers will also lose surplus as a result of this. Not only that, history suggests that a quota indirectly increases the amount of smuggling and illegal trading practices.
Types of quotas
Absolute quota
An absolute quota means there is only a fixed amount of goods and services that can be imported into a country. This amount could be set for specific countries or worldwide. Another permutation there is a collective quota that is divided proportionally for each country. This policy is normally employed by countries with very strict economic policies.
Tariff-rate quota
This is a combination of a tariff and a quota. Initial imports within the predetermined quota will be charged a lower tariff. If they exceed this amount, a higher tariff will be levied. This is usually employed to protect local employers but still allow for the benefits of free trade. It doesn’t cause as much conflict as a quota but is more severe than a tariff.
Conclusion
Quota is an extreme anti-trade policy that limits the number of goods and services a country imports. It is usually used to protect local industries or weaponized against economic opponents.
