Tariffs & Quotas (Cambridge (CIE) O Level Business Studies)

Import Tariffs and Quotas

Import Tariffs

• A tariff is a tax placed on imported goods from other countries 

  • E.g. Tennis rackets imported into the UK from China have a tariff of 4.7%

• A tariff increases the price of imported goods, which helps shift demand for that product or service from foreign businesses to domestic businesses

• American customers are more likely to purchase American cheese now that the tariff has made British cheese more expensive

The benefits of tariffs

• They protect infant industries so they can eventually become more competitive globally

• An increase in government tax revenue 

• Reduces dumping by foreign businesses as they cannot sell below the  market price 

The disadvantages of tariffs

• Increases the cost of imported raw materials, which may affect businesses that use these goods for production, leading to higher prices for consumers 

• Reduces competition for domestic firms, who may become more inefficient and produce poor-quality products for their customers 

• Reduces consumer choice as imports are now more expensive and some customers will be unable to afford them

Quotas

• An import quota is a government-imposed limit on the amount of a particular product allowed into the country 

  • E.g. China has set an import quota on Cambodian rice of approximately 5.32 million tonnes per ye

• Restricting the physical quantity of imports means that domestic businesses face less competition and benefit from a higher market share

  • More of the domestic demand is now met by domestic businesses

The benefits of import quotas

• To meet extra demand, domestic businesses may need to hire more workers, which reduces unemployment and benefits the wider economy

• The higher prices for the product may encourage new businesses to start up in the industry

• Countries are able to easily change import quota as market conditions change

• Foreign countries view quotas as less confrontational to their business interests than tariffs

  • Their exporters can still sell their goods at a higher price in domestic markets (but a limited amount of it)

The disadvantages of import quotas

• Quotas limit the supply of a product and whenever supply is limited, the price of the product rises

• They may generate tension in the relationship with trading partners

• Domestic firms may become more inefficient over time as the use of quotas reduces the level of competition