Difference Between Tariff and Quota

Governments from many nations must interfere in international commerce for both financial as well as non-financial reasons. This type of action is known as protection. There are different techniques of protection. Tariffs and quotas are the most essential forms. They are implemented on both import and export items to preserve a country’s local industry. 

Tariff vs Quota

The main difference between Tariff and Quota is that tariffs merely raise the price without limiting the intensity of competition or commerce volume to any level meanwhile quotas safeguard the domestic sector more since they estimate the extent of foreign competitors to a defined maximum amount.

Tariff and Quota

Tariffs are levies or taxes put on products for income and protection when they are carried from one customs jurisdiction to another. They may also be characterized as a thorough itinerary or list of items, together with the prices that must be charged for every article following the government’s policies and guidelines.

Quotas are government-imposed restrictions on what may be exchanged, how much could be traded, or where the items can be bartered. They do not influence the country’s GDP since they do not engage with constraints on how much can be paid for items.

Comparison Table Between Tariff and Quota

Parameters of ComparisonTariffQuota
MeaningThe tax charged on the import or export of commodities.The limitation placed on the number of commodities imported
Impact on GDPGDP is increasedNo impact
Results inDecrease in consumer surplus and a rise in producer excessDecrease in consumer surplus
Income allocated toGovernmentTo importers
Effect on foreign productsAffect efficient foreign productsAffect both efficient and inefficient foreign producers

What is a Tariff?

Tariffs are used to impose import restrictions. Simply expressed, they raise the price of foreign-purchased products and services, rendering them less appealing to domestic customers.

It is collected by the authorities to boost income and to safeguard domestic enterprises from international competition, as buyers would be drawn to imported items if they are less expensive. It operates as a barrier to international trade.

Tariffs are classified as one of two types: Ad valorem tariff- A tariff determined as a proportion of the cost of imported goods. And, a specific tax, that is levied based on the kind of commodities. 

A significant aspect to remember is that the tariff imposed indirectly impacts the exporting country since local consumers may avoid purchasing their goods owing to the price rise. If the domestic customer continues to prefer the imported goods, the tax has effectively boosted the local consumer’s cost.

Tariffs may be imposed by governments to collect income or to safeguard home industries, particularly those in their early stages, against international competition. Tariffs can make domestically manufactured alternatives appear more appealing by making foreign-made items more expensive.

Tariffs used by governments to assist specific sectors are frequently used to safeguard businesses and employment. Tariffs may also be used as an extension of foreign policy by imposing them on the principal exports of a trading nation to impose economic influence.

What is Quota?

A quota is a trade limitation established by the government that restricts the quantity or monetary worth of commodities that a country can acquire or export within a specific period. They are used in global commerce to help manage the volume of trade between countries.

Quotes on certain items are occasionally imposed by countries to discourage imports and encourage native manufacturing. Quotas, in principle, increase home output by limiting foreign competition.

Quota-based government initiatives are sometimes referred to as protectionist measures. Furthermore, governments might establish similar regulations if they are concerned about the quality or safety of goods entering from other nations.

They are more successful than tariffs at restricting imports, especially when domestic demand is not sensitive to prices. Quotas may potentially have a greater impact on international commerce than tariffs. They can be used as a coercive economic weapon if administered selectively to different countries.

They can be far more difficult to manage than tariffs. With quotas, customs officials must either personally supervise imports to guarantee that no products exceeding the quota value are imported, or they can provide licenses to certain corporations, allowing them to import the amount authorized under the quota. Quotas can also come in the form of a voluntary export restraint (VER), which is administered by the exporting country.

When there is a reduction in consumer surplus and producer surplus, quota holders profit. It generates little money for the government and promotes bureaucratic corruption and trafficking. Everyone wishes for more trading quotas. If they are not received, it can lead to a slew of problems.

Main Differences Between Tariff and Quota

  1. A tariff is a levy that is levied on imported products. While the quota is a government-defined restriction on the number of commodities produced in a foreign nation and sold in the local market.
  2. Tariffs provide income for the nation, hence increasing GDP. In contrast to quotas, is enforced on the numerical worth of commodities rather than the volume, and hence has no impact.
  3. As a result of the tariff, the consumer surplus decreases while the producer surplus increases. Quotas, on the other hand, result in a decrease in consumer surplus.
  4. The government’s revenue is derived from the collection of tariffs. In the event of quotas, however, traders will benefit from the collection.
  5. Tariffs harm efficient foreign products, whereas quotas have an adverse influence on both efficient and inefficient foreign products.

Conclusion

Tariff and Quota are diametrically opposing. Although there are certain parallels, such as how they both serve as a tool to restrict foreign commerce and boost domestic manufacturing to make the country self-sufficient. They continue to have disagreements.

A tariff is a type of tax levied on the importation of goods and services. While quota refers to a government-set upper limit on the number of products or services imported or exported from/to other countries each time.

References

  1. https://books.google.com/books?hl=en&lr=&id=XS7dOQg7te8C&oi=fnd&pg=PP11&dq=tariff+and+quota+&ots=bQ1Le2Ai9l&sig=-zzvfNgZxQ67qDk2avT9aIO94Sc
  2. https://www.jstor.org/stable/134087
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