Friday, August 28, 2009

Kinds of Quotas and their Effects

As a protectionist device, import quotas are alternative to tarrifs. Under an import quota, a fixed amount of a commodity in volume of value is allowed to be imported into the country during a specified period of time usually a year. For this purpose, the government may issue an import license that it may sell either to importers at a competitive price of just give it to importers on the basis of first come first served. Alternatively the government may limit the value of imports by providing the importers with a limited amount of foreign exchange for the purchase of particular commodity to be improved by them. Import quotas aim at restricting and regulating imports in order to protect domestic industries from foreign competition and to correct disequilibrium in the balance of payments. They are also used as retaliatory device.

Import quotas are of five types:

1. Tarrif Quota: Under this quota system, a given quantity of a good is permitted to enter duty free or upon payment of relatively low duty. But imports in excess of the quantity are charged a relatively high rate of duty.

2. Unilateral Quota: Under this system of quota, the total volume of value of the commodity to be imported is fixed by law or decree without any agreement with the other countries. The autonomously fixed quota may be either global or allocated. Under the global quota, the full amount of the quota may be imported from one country. While under the allocated quota system, the total quantity of the quota is distributed among different countries.

3. Bilateral Quota: Under this quota system, quotas are fixed by some agreement with one or more other countries. Haberler calls them agreed quotas.

4. Mixing Quota: This system requires domestic producers in the quota fixing country to use imported raw materials in certain proportion along with domestic raw materials to produce finished products. Thus the quotas of raw material to be imported are fixed in quantity by the government. This quota system benefits the quota fixing country in two ways. First it protects domestic producers of raw materials form foreign competition and second it saves the foreign exchange of the country.

5. Import Licensing: Import licensing is the system devised to administer the various types of quotas. According to this system the amount of the commodity to be imported is first determined on the commodity to be imported is first determined on the basis of the above mentioned quota system. Then import licences are issued by appropriate authority to the importers for specified quantities of commodities to be imported.

Balance of Payments Effect:

The balance of payments effects of an import quota are favourable to the quota imposing country. One of the objectives of fixing import quota is to restrict imports so that they do not exceed the exports of the country. Thus import quotas tend to improve the balance of trade. Further, when imports are limited by the quota, the portion of the national income going to imports is also reduced. This is invested on domestic industries for import substitution and export promotion industries. This tends to increase the income from abroad and thereby improving the balance of payments position of the import quota imposing county.

Here under free trade QQ3 commodity is imported at OP price. The total value of imports is represented by the rectangle AQQ3B. This represents a balance of payments deficit because the amount paid by the importers is the amount received by the other country. To correct this balance of payment deficit an import quota of Q1Q2 is fixed so that the imports are reduced to this quantity. If the government auctions this quota to importers, it receives an amount equal to the area a MN b. Or if the importers are organised they get this much amount as profits which they utilise for further investment with in the country. This is also a saving on the foreign exchange. There is also improvement in the balance of payments because the quota, imposing country pays the amount equal to the area a Q1Q2 b for imports which is less than what is paid under free trade AQQ2B.

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