Import Quota

An import quota is a limit set by a government on the quantity, or sometimes the value, of imports of a particular good that may enter the country during a given period, such as a year. Once the quota is filled, further imports are blocked until the next period. Quotas are a classic tool of protectionism and the opposite of free trade, used to shield domestic producers, manage strategic supplies or respond to balance-of-payments pressure. A mirror-image quota on exports limits how much of a good may leave the country.

Quotas differ from tariffs, which tax imports but let any amount in, and from tariff-rate quotas, which apply a higher tariff above a set volume instead of a ban. In international finance the word "quota" also has an unrelated meaning: a member's subscription to the International Monetary Fund, covered under IMF Quota.

Think of a popular concert hall that lets in only 500 people from outside the city each night, however many want tickets. Local fans face less competition for seats, and the lucky outsiders who get the few passes can resell them at a premium. Once the 500 are in, the doors close to everyone else.

An import quota does the same for goods. Domestic producers face a fixed amount of foreign competition, prices inside the country rise because supply is held back, and whoever holds the right to import, whether a trader, an exporter or the government, can pocket the difference between the high local price and the lower world price.

• Global quotas. A single limit applies to imports from all sources, often filled first-come, first-served.
• Allocated quotas. The limit is divided among supplying countries, usually by their historical market shares.
• Licensing. Importers need a licence for each shipment, and licences can be handed out by history, by application or by auction.
• Voluntary export restraints. The exporting country agrees to limit its own shipments, typically under political pressure from the importer.

Quotas are enforced at the border by customs, which tracks how much of each quota has been used and refuses entry, or charges penalties, once it is exhausted. Determining which country a good comes from depends on rules of origin.

By restricting supply, a quota pushes the domestic price above the world price. The extra value on each imported unit is called the quota rent:

• $P_{d}$ is the domestic price under the quota.
• $P_{w}$ is the world price.
• $Q$ is the quantity allowed in.

If a quota of 100,000 tonnes of sugar lifts the domestic price to $800 a tonne while the world price is $500, the rent is $(800 - 500) \times 100{,}000 = 30{,}000{,}000$, or $30 million a year. Under a tariff the government would collect a similar sum as revenue; under a quota it goes to licence holders or foreign exporters unless the state auctions the licences. This is why quotas tend to attract lobbying and rent seeking.

Quotas also differ from tariffs when demand changes. With a fixed quantity, any rise in demand shows up entirely as higher prices, so domestic producers face no extra foreign competition even in a boom. Quotas can turn a competitive domestic market into one closer to monopoly, and exporters facing quotas often switch to higher-value products to earn more per unit allowed.

Article XI of the General Agreement on Tariffs and Trade generally bans quantitative restrictions on trade, with exceptions for balance-of-payments problems, some security and health reasons, and certain other cases. Agriculture and textiles long escaped that rule. The Multi-Fibre Arrangement, introduced in 1974, set bilateral quotas on textile and clothing exports from developing countries such as India, Pakistan and Bangladesh; the WTO's Agreement on Textiles and Clothing phased those quotas out, ending on 1 January 2005. The Uruguay Round agreement on agriculture converted most farm quotas into tariffs and tariff-rate quotas.

In 1981 Japan agreed to limit car exports to the United States, the best-known voluntary export restraint; Japanese makers responded by shipping more expensive models and later building plants in the US, an early example of foreign direct investment used to get around a trade barrier. The WTO Agreement on Safeguards, in force since 1995, bans new voluntary restraints of this kind. Quotas have not disappeared: the United States agreed steel quotas with South Korea, Brazil and Argentina in 2018 in place of Section 232 tariffs, and governments still use export quotas on food and critical minerals during shortages, and outright bans on trade with particular countries are imposed as economic sanctions. The World Trade Organization has ruled against several export quotas, including China's limits on rare earths in 2014.

• World Trade Organization: General Agreement on Tariffs and Trade 1947
• World Trade Organization: Safeguard measures