Import Quotas: Meaning, Objectives and Types | International Economics

In this article we will discuss about:- 1. Meaning of Import Quotas 2. Objectives of Import Quotas 3. Types.

Meaning of Import Quotas:

The import quota means physical limitation of the quantities of different products to be imported from foreign countries within a specified period of time, usually one year. The import quota may be fixed either in terms of quantity or the value of the product.

For instance, the government may specify that 60,000 colour T.V. sets may be imported from Japan. Alternatively, it may specify that T.V. sets of the value of Rs. 50 crores can be imported from that country during a given year.

For the purpose of restricting imports, it may adopt one of the alternative ways such as:

(i) Issue of import licence to the highest bidder in the open market;

(ii) Issue of import licence by calling for the tenders form prospective importers, the highest tenderer getting the licence;

(iii) Issue of import licence on first-come first-serve basis;

(iv) Issue of import licences of specific categories of importers such as established importers, star trading houses, actual users etc.;

(v) Issue of import licences to some government agency such as the State Trading Corporation.

Objectives of Import Quotas:

The system of prescribing import quota is resorted to by the government of a country for realising some of the following objectives:

(i) To afford protection to domestic industries through restricting foreign competition by limiting the imports from abroad.

(ii) To make adjustment in the adverse balance of payments. The restriction of imports through quotas can reduce the balance of payments deficit faced by the country.

(iii) To conserve the scarce foreign exchange resources of the country and to direct their use for high-priority import items.

(iv) To ensure the stabilisation of the internal price level by properly regulating the imports of goods from abroad.

(v) To discourage conspicuous consumption by the wealthy sections through placing quota restrictions on the import of luxury goods.

(vi) To improve the international bargaining position of the country through allocating larger import quotas for the products of such countries as allow a liberal inflow of the products of the home country.

(vii) To retaliate against the restrictive trade policies adopted by some of the foreign countries.

(viii) To check the speculative imports in anticipation of changes in exchange rates, tariff rates and internal money and credit policies, the government may take resort to import quota.

Types of Import Quotas:

The main types of import quotas are as below:

(i) Tariff or Custom Quota:

In the case of tariff or custom quota, a certain specified quantity of a commodity is allowed to be imported by the government of the importing country either duty free or at a low rate of import duty. The imports in excess of this specified quantity are subject to a relatively higher rate of tariff. A tariff quota is either an autonomous quota or agreed quota. The autonomous tariff quota is fixed by decree or law. On the opposite, the agreed tariff quota is one, which is the result of some agreement between the quota-imposing country and one or more foreign countries.

This variant of import quota has some merits. Firstly, this system has the advantage of flexibility and it synthesises the tariff and import quota. Secondly, as the imports above-a specific limit are subject to a higher rate of tariff, this system, on the one hand, restricts imports and conserves scarce foreign exchange resources and, on the other hand, yields revenues to the government.

Thirdly, this system does not completely prohibit imports. Some quantity of the importable goods is allowed to enter the home market either without duty or at very low rate of duty. Fourthly, the prices of domestic products under this system remain related to the prices of the foreign products. The home prices of a given product are not supposed to exceed the foreign prices by more than the amount of custom duty leviable upon it.

Although this system has some merits, yet its drawbacks cannot be overlooked. The main drawbacks of this system are- Firstly, since the imports upto a specified limit are allowed duty free or at low rates of tariffs, the entire gain from low rates is enjoyed by the exporting country.

Secondly, the rush of imports at low rates of tariff is likely to have disturbing effect upon the domestic price structure.

Thirdly, this system discriminates against the relatively poor consuming sections, as they cannot import goods at higher tariff rates. On the contrary, the wealthy consuming sections can continue to secure the supply of foreign products even at higher tariff rates.

(ii) Unilateral Quota:

Under the system of unilateral quota, a country places an absolute limit upon the quantity of a commodity to be imported during a specified period. This limit is fixed without any prior negotiation or agreement with the foreign countries. The unilateral quota can be broadly of two types – (a) global quota and (b) allocated quota. In the case of global quota, the entire quantity to be imported may be obtained from any one or more countries during the specified period. Under the allocated quota system, the total quantity of import quota is allocated or distributed among the different exporting countries on the basis of certain criteria.

The global quota system allows the importing country to import even entire quota from anyone country. This greatly improves the bargaining position of the importing country. The exporting countries compete among themselves to capture the market of the importing country. They offer their products at lower prices and assure more favourable terms of trade compared with the rival countries.

However, the global quota system suffers from certain defects. Firstly, the global quota system generally favours the nearby exporting countries than the distant countries.

Secondly, as the quota is announced by the government, the importers rush to make imports. This results in the flooding of home market and unnecessary stock-piling of goods. Such a situation may cause rapid fall in prices.

Thirdly, in the subsequent stages when the quota does not permit further imports, shortages and consequent rise in-prices occur.

Fourthly, in the global quota system, the small and less organised countries are at a disadvantage compared with the large and advanced industrialised countries.

Fifthly, the global quota system does not provide sufficient protection to the home industries from foreign competition.

In view of the above defects of global unilateral quota, the countries have developed preference for the allocated quota. But even the allocated quota system is not free from drawbacks. The main drawbacks in the allocated unilateral quota are- Firstly, this system results in avoidable rigidity in the sources of supply of imports.

Secondly, this system may not prove to be cost and quality efficient. Some quota may be allocated, for political reasons, to such countries where the cost is relatively higher and the quality of the product is somewhat inferior.

Thirdly, as the exporting countries are assured of their share in the import quota, there is possibility of foreign firms indulging in monopoly practices. Fourthly, the system is often criticised as discriminatory and creates a sense of grievance among some of the trading partners.

(iii) Bilateral Quota:

In case of the bilateral quota system, the import quota is fixed after negotiations between the importing and exporting countries. Haberler has called the bilateral quotas as agreed quotas.

The system has the following merits:

(a) As the quotas are fixed after negotiations among the countries, there is discrimination against one or the other country.

(b) There is no possibility of excessive fluctuations in imports and prices.

(c) The exporting countries are not likely to resort to monopolistic practices.

(d) It is not arbitrary. Therefore, it may not provoke opposition and retaliation by the foreign countries.

This system, at the same time, has the following drawbacks:

(a) This system promotes the formation of international cartels.

(b) It opens the floodgate of corruption on an extensive scale.

(c) The exporting countries, after securing the desired quota, may raise the prices of their products to the detriment of importing countries.

(d) This system greatly intensifies competition.

(e) It is an open invitation to monopolies in the exporting countries.

(iv) Mixing Quota:

Under this system, which is also known as indirect quota, the domestic producers in the quota-fixing country are required to make use of domestic raw materials along with the imported raw material in a specified proportion.

This system of import quota has the following merits:

(a) It affords protection to the producers of raw materials.

(b) It saves the valuable and scarce foreign exchange resources of the country.

(c) It induces the domestic processing of semi­-finished goods and manufacturing of finished goods.

The system of mixing quota is, however, is subjected to some objections on the following grounds:

(a) If the domestic materials, which are required to be used in a fixed proportion along with imported materials, are of poor quality, there is a danger of deterioration in the quality of production in the quota-enforcing country.

(b) It causes deviation from the principle of comparative cost advantage and thus results in inefficiency and higher cost structure.

(v) Licensing of Imports:

The government of a country may prescribe any one of the systems of import quota. The most crucial aspect of any system of fixation of quota is its administration. For this purpose, the government may follow the mechanism of issuing licences to different categories of importers on the basis of specific terms, conditions and norms.

The system of issuing licences for the regulation of imports has the following main merits:

(a) The licensing authority can have an effective control over the volume of imports.

(b) The system tends to discourage the speculation in foreign exchange.

(c) It does not permit wide fluctuations in prices.

(d) It assures continuous supply of scarce products from abroad and prevents domestic shortages in a more efficient manner.

(e) This system has a great deal of flexibility and is easily adaptable to changing situations.

(f) It ensures the economical use of foreign exchange resources of the country.

The system of licensing of imports, at the same time, suffers from certain defects indicated below:

(a) This system generally favours the established, and prevents the entry of new importers. Thus the system of licensing of imports tends to encourage the growth of monopolies in the import trade.

(b) This system promotes bureaucratic corruption, favouritism and nepotism.

(c) Another defect of the system is that it tends to create ‘premium market’ for licences. Some of the unscrupulous importers transfer their licenses to the others and pocket substantial amounts of premia. This practice increases greatly the prices of imported goods and can intensify the inflationary condition within the quota enforcing country.

(d) The licensing tends to make the system more rigid.

(e) It causes concentration of economic power in the hands of small and privileged groups of established importers.