The Theory of Quotas
A quota may be defined as a trade restriction imposed by the government, which limits the monetary or numerical value of the goods that members of a country can export or import during a specific period. Quotas are used by most countries in international trade to help in the regulation of the volume of business among them and other countries. They are usually imposed on specific products to ensure that imports are reduced, and the domestic production increases; hence, it can be said that quotas help in boosting the local production mainly by controlling foreign competition (Bhagwati & Jagdish. 143). Customs or tariffs are those taxes imposed on exports or imports, which are different from quotas. The government uses both tariffs and quotas as protective measures to control the trade within a country and between countries.
The difference between quotas and tariffs is that quotas usually focus on the limitation of quantities of a particular good that a country exports or imports for a given period while tariffs focus on imposing specific fees on such products (Fulginiti, Lilyan, and Richard Perrin. 97). In the choosing between quotas or tariffs, one of the main concerns is the protective effect of the policy. Even though tariffs and quotas are equal in terms of their welfare effects and static price, the equivalence never remains to be right in the market changes face and therefore there is need to consider market changes such as a decrease in the world price, an increase in domestic demand as well as an increase in local supply.
Earlier this year, the European Union adopted quotas for all the farming produces that it would accept in its countries from the third world countries after Britain left the bloc and recognized that this could happen after it concluded the talks with the countries on the matter (Benton, Tim, et al.). The Union has a series of tariff-rate quotas that allows agricultural producers such as the Latin American countries, the United States, New Zealand as well as Australia to export specific amount of dairy, live animals, meat as well as other produce free of tariffs. The planned exit by Britain meant that the quotas could be split among the 27 countries that remained in the Union as well as Britain.
In fifty-one pages, the European Union regulation listed products starting with the 11,500 tonnes of beef from Canada and the United States with which the EU27 were to take on 99.8% to New Zealand’s 228,389 tonnes of lamb which was to be split half-half. The quota adopted by the European Union may be referred to as import quota (Smith, Vincent, and Ryan Nabil). An import quota is a type of trade restriction or control that sets physical limits on the number of commodities or goods that a given country can import in a given period.
A quota in the above diagram is the difference between the S(domestic) + and the S(local) quota. When the quota is not available, then the market price is P world; the world exporters make a revenue of areas A+B+C, and the quantity of imports is Q4-Q1. On imposing of quotas of Q3-Q2, the imports fall to adjust Q3-Q2, the world exporters make less revenue, the domestic suppliers gain more income, the society experiences a net welfare loss since the declining consumer surplus offsets the increase in producer surplus, the consumers get to pay a higher price and the overall quality falls from Q4 to Q3. The government is not affected directly since there is no income.
This is the expected result of the European Union countries after the import quota was imposed. Domestic farm producers will get an increase in their total revenue, while the third world exporters will make fewer revenues when their supplies get restricted by the quota. The consumers of the farm products who live within the European Union countries will pay more for the products, and imports will be reduced.