The Effects of Tariffs and Quotas

6 Pages Posted: 5 Apr 2010

See all articles by Peter Marcel Debaere

Peter Marcel Debaere

University of Virginia - Darden School of Business; Centre for Economic Policy Research (CEPR)

Abstract

This note discusses the welfare implications of tariffs for consumers, producers, and the government. A brief survey of the state of protectionism in recent years is included.

Excerpt

UVA-G-0595

Rev. July 24, 2009

The Effects of Tariffs and Quotas

Tariffs and quotas are the most prominent tools of protection. Any global firm is bound to encounter them as impediments to its exports or as hurdles for its imports. As Japanese car manufacturers in the United States showed in the early 1980s, multinationals sometimes set up affiliates abroad to circumvent import restrictions. But even those firms that do not venture into foreign markets should know about tariffs and quotas, because they will affect the size of the domestic market and the price that can be charged. In this note, the welfare effects of tariffs and quotas on consumers, producers, and the government are outlined. At the same time, a brief overview of protectionism in recent years and a short discussion of why protectionism occurs are given.

Tools of Protection

Policymakers have many ways to shield a local industry. A common way is through tariffs and quotas. Tariffs are taxes on imported products that are paid at a country's border. Quotas amount to quantitative restrictions on imports. Tariff protection gradually declined after World War II, due to the trade liberalizations that started under the umbrella of the General Agreement of Tariffs and Trade (GATT). Recent estimates by the World Bank (world development indicators) put the average tariff in manufacturing for high-income OECD (Organisation for Economic Co-operation and Development) countries at 3.3% and at 11% for developing countries. Agricultural trade liberalizations have only been on the agenda very recently. This, in part, explains why they are much higher: 10.6% for the same high-income countries and 16.3% for developing countries.

There are many other ways to protect an industry. One can, for example, impose high quality and safety standards on foreign products. So long as domestic producers have to meet the same standards, those standards technically do not amount to protection. There is room, however, for some discussion. A country can tailor the standards to the product descriptions at home, and thus give the home producers an unfair advantage. It becomes even less clear when cultural/societal preferences are involved. Just think of the ongoing debate between the United States and the European Union over genetic engineering, or more generally, the debate about the oftentimes much stricter standards for antibiotics in the European Union versus the United States. To what extent do these measures constitute a safety issue or rather a way to protect an industry? Similarly, foreigners have often found it hard to break into Japanese markets and have sometimes blamed the differential treatment of their products by retailers. And finally, there is red tape: all kinds of procedures that may delay exporter access to a country's market.

Trade Liberalizations and Protection under the WTO

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Keywords: international trade policy

Suggested Citation

Debaere, Peter Marcel, The Effects of Tariffs and Quotas. Darden Case No. UVA-G-0595, Available at SSRN: https://ssrn.com/abstract=1583766

Peter Marcel Debaere (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/html/direc_detail.aspx?styleid=2&id=5794

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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