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Why Are Tariffs Preferable to Quotas?

Tariffs vs. Quotas

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[Q:] Why are tariffs preferred to quantitative restrictions as a means of controlling imports?

[A:]Thanks for your question!

Tariffs and quantative restrictions (commonly known as import quotas) both serve the purpose of controlling the number of foreign products that can enter the domestic market. There are a few reasons why tariffs are a more attractive option than import quotas.

Three Reasons Why Tariffs Are Preferable to Quotas

  1. Tariffs Generate Revenue for the Government: If the U.S. government puts a 20% tariffs on imported Indian cricket bats they will collect $10 million dollars if $50 million worth of Indian cricket bats are imported in a year. That may sound like small change for a government, but given the millions of different goods which are imported into a country, the numbers start to add up. The Progressive Policy Institute has found that the United States collects 20 billion dollars a year in tariff revenue. This is revenue that would be lost to the government unless their import quota system charged a liscencing fee on importers. Which brings me to point 2.

  2. Import Quotas Can Lead to Administrative Corruption: Suppose that there is currently no restriction on importing Indian cricket bats and 30,000 are sold in the U.S. each year. For some reason the United States decides that they only want 5,000 Indian cricket bats sold per year. They could set an import quota at 5,000 to achieve this objective. The problem is: How do they decide which 5,000 bats get in and which 25,000 do not? The government now has to tell some importer that their cricket bats will be let into the country and tell some other importer than his will not be. This gives the customs officials a lot of power as they can now give access to favored corporations and deny access to those who are not favored. This can cause a serious corruption problem in countries with import quotas as the importers chosen to meet the quota are the ones who can provide the most favors to the customs officers.

    A tariff system can achieve the same objective without the possibility of corruption. The tarriff is set at a level which causes the price of the cricket bats to rise just enough so that the demand for cricket bats falls to 5,000 per year. Although tariffs control the price of a good, they indirectly control the quantity sold of that good due to the interaction of supply and demand.

  3. Import Quotas Are More Likely to Cause Smuggling: Both tariffs and import quotas will cause smuggling if they are set at unreasonable levels. If the tariff on cricket bats is set at 95% then it's likely that people will try to sneak the bats into the country illegally, just as they would if the import quota is only a small fraction of the demand for the product. So governments have to set the tariff or the import quota at a reasonable level. But what if the demand changes? Suppose cricket becomes a big fad in the United States and everybody and their neighbour wants to buy an Indian cricket bat? An import quota of 5,000 might be reasonable if the demand for the product would otherwise be 6,000. Overnight, though, the demand has now jumped to 60,000. With an import quota there will be massive shortages and smuggling in cricket bats will become quite profitable. A tariff does not have these problems. A tariff does not provide a firm limit on the number of products that enter. So if the demand goes up, the number of bats sold will go up, and the government will collect more revenue. Of course, this can also be used as an argument against tariffs as the government cannot ensure that the number of imports will stay below a certain level.
For these three reasons, tariffs are generally considered to be preferrable to import quotas.

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