Tariffs and Quotas

Tariffs are taxes imposed on foreign-made goods (imports) coming into a country. The tax (also referred to as a duty) raises the price of the good. This has the immediate effect of shielding domestic manufacturers from some of their foreign competitors, and thus tariffs are referred to as protectionism. The tax protects domestic producers (and the labor employed by those domestic firms) from foreign competition by allowing relatively less efficient domestic producers (who must charge a higher price than more efficient firms if they are to recoup their costs) to remain in business. Simultaneously, the product price rises, and the government collects tariff revenues from its domestic consumers, who must pay both the original price of the import and the amount of the tariff. Thus, the winners from tariffs are the government imposing the tariff and the domestic firms and labor whose products receive tariff protection, while the losers are domestic consumers, who pay higher prices for the product and consume less of that product than they would at the free trade price.

While a quota has the same impact as a tariff, it differs in the government action taken. With a quota, the domestic government does not impose a tax on imports [Page 2046]but rather restricts the number of units of a product that may enter the country from foreign manufacturers. And, as with a tariff, the price of the good increases and the amount of the good supplied by domestic firms increases. However, unlike with a tariff, the government does not collect any revenue.

Tariffs and quotas are examples of a redistributive policy, where the costs of the policy are broadly distributed among domestic consumers and foreign competitors, while the benefits are concentrated with the protected industries and their labor. Conversely, the economic benefits of free trade are broadly distributed among all consumers and foreign producers, while the costs are concentrated in the noncompetitive domestic firms, making the incentives to fight free trade often stronger than the incentives to fight trade protection.

Political economists recognize beneficial reasons for imposing tariff or quota protections, beyond just job protection. First, many nations protect militarily important industries to ensure that national firms retain the ability to manufacture or innovate products deemed critical to national security; industries such as electronics, computers, aerospace, and even agriculture have been protected using national security rationales. Second, since it is virtually impossible for new entrants in some industries (particularly those with steep learning curves) to compete successfully against established firms from abroad, some countries protect “infant industries” in the hope that sheltering new domestic firms from the full onslaught of competition will enable the domestic companies to become viable long-term global competitors and thus provide the country with important employment and technological benefits. The commercial aircraft (particularly Airbus in the European Union) and semiconductor industries (particularly in Japan) are among the more celebrated examples of infant industry protection. Finally, some countries respond to foreign nations' imposition of tariff or quota protections by retaliating with their own protectionism; this “tit-for-tat” tariff-setting sometimes prompts the first-tariff-imposing nation to lift its tariff.

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