Saturday, May 16, 2009

Why Tariffs More Preferable Than Quota?

Both tariffs & import quota are protectionist tools that attempt to limit the number of foreign goods from flooding the domestic market. They are also similar in many ways such as safeguarding locals from job losses, local consumers ending up paying higher price, loss of consumer surplus & increase in producer surplus

However, tariffs may be a better option than import quotas


(1) Revenue for government. After the imposition of tariffs, quantity of goods imported will shrink & become Q’sQ’d. The value of tariff is (P* - Pw) per unit of good. Therefore the tariffs revenue for the government would be (Q’sQ’d) x (P* - Pw) & is given by area D. There is another way of looking at this. Suppose UK government puts a 20% tariff on imported textile from China & they will therefore collect £20 millions if £100 millions worth of textile are imported in a year. Although this figure could be insignificant for a government, bear in mind that there are hundreds if not thousands of goods that are subjected to tariffs. However, under import quota the area D will be lost as it turns into profits of foreign producers

(2) Corruption. Assume that currently there is no restriction on imported steels into US & therefore 45 million tonnes are brought in every year. Now, since US is in recession, say President Obama ruled that foreign steels must be limited to give local steel mills some breathing space & as such only 20 millions tonnes can be brought in the following year. This import quota now raises an issue. Which 20 million gets in & which 25 million don’t? Of course some importers will be told that their steels will be let into US while some others will not be. This gives custom officials the opportunity to abuse their power. They permit access but only to those corporations that bribe them the most.

With tariffs, the same objective may be achieved without corruption. This is because the tariff is set at a level which causes the price of steel to increase just enough so that the demand for steels fall to only 20 million a year. Although it controls the price of steels, indirectly it is also able to control the quantity of goods due to the interaction of demand & supply

(3) Encourage smuggling. If quota is set at an unreasonable level, it may lead to smuggling activities. For instance, restricting the import of a particular good to only 10, 000 units while the demand is 50, 000. With such great shortage, smuggling will be very profitable. On the other hand, tariff does not limit the amount of goods that can enter into a country, but rather discouraging it. So, if the demand for a good is so great, firms can just place higher order & bring more in. Government’s revenue will also increase in such a way

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