Import Quotas and Tariffs

By Saad Bin Abbas

Import:

The defined limit by the government on the quantity of a good that can be imported.

Tariffs:

Tax that imposed by the government on an imported good.

Analysis of Import Quotas and Tariffs:

When countries want to stay the national price of a product above world levels and thereby permit the national industry to enjoy higher profits than it might under free trade, many countries use import quotas and tariffs for that purpose. As we will comprehend, the cost to taxpayers from this protection can be high, with the loss to consumers exceeding the gain to national manufacturers.

Graphical Explanation: Import Tariff or Quota that eliminate Imports:

Short of a quota or tariff in a country, the country will import a good when its world price is lower the price that would triumph nationally were there no imports. Figure I indicate this principle. The national supply and demand curves are represented by D and S. The national price and quantity would be represented as P0 and Q0, if there were no imports, which associate supply and demand. But because the world price Pw is below P0, national consumers have an incentive to purchase from abroad and will do so if imports are not restricted. How much will be imported? The national price will fall to the world price Pw; at this lower price, national production will fall to Qs, and national consumption will rise to Qd. The difference between national consumption and national production is then Imports, Qd − Qs.

Let’s assume the government, bowing to pressure from the national industry, eradicates imports by commanding a quota of zero-that is, dismal any importation of the good. What are the gains and losses from such a policy?

When there are zero imports allowable, the national price will increase to P0. Buyers who still purchase the good (in quantity Q0) will pay additional and will miss an amount of surplus given by trapezoid A and triangle B. In addition, given this higher price, some consumers will no longer buy the good, so there is an additional loss of consumer surplus, given by triangle C. The total change in consumer surplus is therefore

∆CS = — A — B — C

What about manufacturers? The output is sold at a higher price (P0 instead of Pw) and is now greater (Q0 instead of Qs). Manufacturer surplus, therefore, increases by the amount of trapezoid A:

∆PS = A

The change in total surplus, CS + PS, is, therefore −B − C. Over again, there is a deadweight loss-consumers lose more than manufacturers get more.

Imports could also be lessened to zero by imposing an adequately large tariff. The tariff would have to be equal to or greater than the difference between P0 and Pw. When the tariff will be of this size, definitely there will be zero imports and, therefore, there will not be any government revenue from tariff gatherings, so the effect on consumers and manufacturers would be similar as with a quota.

Every so often, government policy is designed to lessen imports but never initiated to eradicate imports. Yet again, this can be done with either a tariff or a quota, as Figure II indicate. Below open trade, the national price will equal the world price Pw, and imports will be Qd − Qs. Let’s assume that a tariff of T dollars per unit is forced on imports. At that point the national price will rise to P* (the world price plus the tariff); national production will increase and national consumption will fall.

In Figure II, this tariff indicates to a change of consumer surplus given by

∆CS = — D — C — B — A

The change in manufacturer surplus is again

∆PS = A

Finally, the government will gather revenue in the amount of the tariff times the number of imports, which is rectangle D. The total change in welfare, CS plus PS plus the revenue to the government, is, therefore, −A − B − C − D A D −B − C. The triangles C and B which is in figure again representing the deadweight loss from restricting imports. (B represents the loss from national overproduction and C the loss from too little consumption).

Suppose the government practices a quota system as an alternative of a tariff system to confine imports: Foreign manufacturers can only ship a specific quantity (Q’d − Q’s in Figure II) to the United States and can then charge the higher price P* for their U.S. sales. The variations in U.S. purchaser and manufacturer surplus will be the same as with the tariff, but instead of the U.S. government gathering the revenue given by rectangle D, this money will go to the foreign manufacturers in the form of higher earnings. The US as an entire will be even poorer off than it was under the tariff, losing D as well as the deadweight loss B and C.

This situation is exactly what transpired with automobile imports from Japan in the 1980s. Under burden from national automobile manufacturers, the Reagan administration negotiated “voluntary” import manacles, under which the Japanese granted to restrict shipments of cars to the United States. The Japanese could consequently sell those cars that were shipped at a price higher than the world level and seizure a higher profit margin on each one. The United States would have been restored by just commanding a tariff on these imports

Originally published at https://www.studentsofeconomics.com.